Forex Fundamental Trading Strategies
Sometimes, a fundamental approach is even more important than a technical one. From George Soros to Warren Buffet, some of the world’s most famous traders have admitted that they owe their fortunes to the fundamental analysis they have made over the years.
- Main market forces
- Where can we find all the information?
- The power of expectations
- The Importance of the Economic Calendar
- In conclusion
George Soros once made more than $1 billion in a forex trade alone, going short on AUD/USD, based on fundamental analysis. The Chinese economy was showing signs of weaknesses, and the Australian economy is heavily dependent on the exports of raw materials to China. The weakening of the Aussie economy and the cutting of interest rates by the RBA were the reasons behind the trade. Thanks to this, he is USD 1 billion richer. This is a good example of how fundamental analysis should be employed.
Chart showing how Soros sold AUD/USD and made $1 billion:
Fundamentals do not get the attention they deserve. Too many traders use only technical trading approaches without knowing anything about the economic environment and the markets in which they work. On the other hand, many traders do just the opposite – abandon technical analysis and follow only fundamentals. Like in many other things, our approach in Chweya’s Forex Course is that combining these two approaches is ideal. To trade like pros, you should get to know them well.
Fundamentals help us understand markets and trends deeply, intuitively, and logically. Fundamental traders are considered long-term investors. Fundamental traders are most often very familiar with market forces and know one or two things about the economy, capital markets, and microeconomics. Their goal is to profit by taking advantage of opportunities as they arise, so they have to be particularly well acquainted with the rules of the game, the players, and the playing field.
Remember, News and events you access on the internet, TV, and radio affect the Forex market.
What exactly is the fundamental approach based on? How can we use it in our trading strategy?
Let’s think of the different economies in the world. Think of the economy of the market in which you live. Think of market conditions, the endless amount of news every day, hour by hour. The world has become very small – a global village, as the cliche goes.
Wars, elections, politics, social issues, and many other factors affect Fundamentals. One of the great fundamental events that recently shook the forex market, sent the Euro 500 pips down, and made the British Pound collapse by about 20 cents (2,000 pips), was the Brexit referendum to leave the EU. Each new event or announcement causes reactions from investors and speculators, not only within this market but worldwide. Governments, central and commercial banks, policies, and even natural disasters all play a part in Forex.
Think about it this way – if the owner of the grocery store next to your house would reduce prices, you would probably buy there more. If you think of buying a new stereo for your living room and find out that in one month, the government is planning a tax increase on electrical goods, you will probably buy it earlier. Now imagine there are tens of events influencing trade each day, sometimes dramatic events, drastically affecting the market. Are you starting to understand why fundamentals are so important?
Planning for the long term: Fundamental analysis is less efficient for forecasting trends in the short term. This approach explains and teaches what logically “should” happen right now to market prices, a reaction to events. Therefore, it is a great system for the long term. It explains global trends.
Fundamentals discuss the reasons for present trends and not the trends themselves. Some events last much longer than traders’ responses, having longer effects on markets.
Tip: Fundamental trading is not advised for a couple of days of trading (and not for intraday trading). It suits traders who search for long-term trends, which can be in weeks, months, and even years.
Economic news surrounds us – Fundamental data comes from varied sources and appears as announcements, reports, and releases. You can read them online, through the Web, on news sites, economics, capital markets, and Forex sites. The regular media publishes many of the events.
Example of an economic event:
“An interest rate decrease of that percentage may cause the euro to go down.” or “Consumer confidence rose 4% since the last report.”
To become a fundamental trading expert, you must see the whole picture. Use your experience to recognize a range of connected events, and don’t just analyze a single piece of data.
One fundamental announcement might shatter all previous technical analyses you have built and followed. Traders working only with short-term technical tools often miss great longer-term investment opportunities (and vice versa).