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chris-sheep-berriman · 3 years ago

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The How to on Trend Lines

Trend lines

Trend lines are lines drawn at an angle above or below the price. They are used to give indications as to the immediate trend and indicate when a trend has changed. They can also be used as support and resistance and provide opportunities to open and close positions.

Drawing trend lines

The chart below shows an example of a trend line in a downtrend and an uptrend.

Shows three swing highs on the downtrend

Shows three swing lows on the uptrend

When drawing trend lines in a downtrend, you draw them above the price.

When you draw trend lines in an uptrend, you draw them below the price. It is the highs on a downtrend and the lows on an uptrend that will determine a trend line.

At least two swing highs or swing lows are needed to draw a trend line in either direction. However, for a trend line to be valid, at least three highs or lows should be used. Essentially, the more times the price touches a trend line, the more valid it is, because there are more traders using them as support or resistance.

Using the wicks or bodies of the candles

To draw trend lines, some traders use the bodies of the candlesticks, while others prefer the wicks. While the majority of people will use the wicks to draw trend lines, the use of the bodies is an acceptable way to draw trend lines on a chart.

The chart below shows a trend line drawn using the wicks of the candlestick.

The next chart below shows a trend line drawn using the bodies of the candles. Either of these are acceptable.

Trend lines are subjective, so use what you feel comfortable with. However, it is important not to deviate from the method that you choose.

Using trend lines to trade

There are two predominant methods in which to trade using trend lines:

Entering when the price finds support or resistance at the trend line

Entering when the price breaks through the trend line

Trend line as support or resistance

If a trend line has been identified and it is holding as support or resistance, then you can use the trend line to enter into the market once the price comes back to it.

Short entry after the price finds resistance at the trend line

Stop loss above the trend line

The chart above shows the trend line being used as resistance and the price using it to find an entry.

A stop loss can be put on the other side of the trend line. The size of the stop loss depends on the strategy involved.

Trend line break

The trend line break method uses the actual breakout of the line to determine an entry. When the price breaks through a trend line, it is no longer valid as support or resistance and it is likely that the price will continue to reverse direction. There are two ways to enter using a trend line break: an aggressive entry and a conservative entry.

An aggressive entry

An aggressive way to enter using a trend line break is to enter as soon as the candle breaks through and closes on the other side of the trend line.

Short entry after the price broke through the trend line to the downside

Stop loss is placed above the trend line

The chart above demonstrates that once the candle closes on the other side of the trend line, then you can enter immediately. A stop loss can be placed on the other side of the trend line.

A conservative entry

A more conservative way of trading the trend line break is to wait until the price has broken through the trend line and then tested from the other side as either support or resistance.

Price breaks through the trend line to the downside

Wait for the price to come back to the trend line and find resistance

Once determined that the breakout is true, enter into a short entry

Stop loss is placed above the trend line

The chart above shows a trend line that has been broken after acting as support. The price then tested it from the other side as resistance, further confirming that the breakout is likely to continue. After the trend line has been tested as resistance, you can enter a short position and place a stop loss on the other side of the trend line.

Caution using trend line breaks

In order to trade a breakout of a trend line, it is a good idea to wait until a candlestick actually closes on the other side, or tests the other side of the trend line as either support or resistance. Without a close on the other side of the trend line, it is generally not considered an actual break.

False breakout

In the above chart, the price moved below the trend line. However, it retraced and the candlestick closed above the trend line. If a trader entered as soon as the price broke through, it would have been a losing trade.

#forex #forex education #forex mentorship #forextrader #forex coach #forex data #forexmarket

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chris-sheep-berriman · 3 years ago

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Central Banks Overview

In its simplest context, Central Banks are responsible for overseeing the monetary system for a nation (or group of nations); however, central banks have a range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment.

Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort.

There are eight major central banks today:

US Federal Reserve Bank (US)

European Central Bank (EUR)

Bank of England (GBP)

Bank of Japan (JPY)

Swiss National Bank (CHF)

Bank of Canada (CAD)

Reserve Bank of Australia (AUD)

Reserve Bank of New Zealand (NZD)

Central Banks and Interest Rates

The balancing act of stable employment and prices is a tricky one, and the main mechanism a central bank has to regulate these levels is interest rates. Interest rates are a primary influencer of investment flows.

The reason for either raising or lowering the interest rate and why it has an influence is easy to see when you really think about it. Consider for a moment an economic environment where banks are concerned about the economy and are hesitant to loan money out of fear of not being paid back.

If interest rates are high, the safer option would be to keep the money and only loan to those whom they feel would pay back the loan at a high interest rate. An environment of this kind would make it difficult for small businesses that don’t have credit history to borrow money. Plus a higher cost to borrow may dissuade businesses from borrowing. The same would be true for individuals looking to buy houses.

If the same economic scenario were presented but interest rates were low, banks may feel that taking the risk in loaning to less-than-impeccable businesses is worth it, particularly since they could also borrow money from the central bank at extremely low rates. This would also lower the interest rates for buying a home.

Businesses borrowing money to grow their bottom line and individuals buying homes are two vital keys to a growing economy, and central banks typically try to encourage it. However, there are times when it gets a little out of control and too much risk is being taken, which can lead to painful economic downturns.

Central banks attempt to balance the needs of businesses and individuals by managing interest rates.

How interest rates influence traders

Traders are influenced by the rates at central banks as well. When buying one currency against another in a forex transaction, you are essentially taking ownership of that currency using the counter currency as the funds of your transaction. For instance, of you are buying the NZD/JPY (New Zealand Dollar/Japanese Yen), you are borrowing JPY to buy NZD. If you borrow, you pay the borrowing cost (interest rate) to get those funds, but on the flipside, you are earning interest on that which you bought. If the JPY has an interest rate of 0.10% and the NZD has interest rate of 2.50%, you are earning more interest than you are paying for the transaction.

Some investors take a long-term approach of borrowing low interest rate currencies and buying those with high interest rates, a strategy called the “carry trade.” While the carry trade can be profitable, when only considering the interest earned it is typically negligible. The values of the currencies against one another plays a much bigger role in the day-to-day profitability of the position, and can far outweigh any interest earned.

#forex #forex education #forex data #forex coach #forex trader

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chris-sheep-berriman · 3 years ago

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At its simplest, forex trading is similar to the currency exchange you may do while traveling abroad: A trader buys one currency and sells another, and the exchange rate constantly fluctuates based on supply and demand.

Currencies are traded in the foreign exchange market, a global marketplace that’s open 24 hours a day Monday through Friday. All forex trading is conducted over the counter (OTC), meaning there’s no physical exchange (as there is for stocks) and a global network of banks and other financial institutions oversee the market (instead of a central exchange, like the New York Stock Exchange).

A vast majority of trade activity in the forex market occurs between institutional traders, such as people who work for banks, fund managers and multinational corporations. These traders don’t necessarily intend to take physical possession of the currencies themselves; they may simply be speculating about or hedging against future exchange rate fluctuations.

A forex trader might buy U.S. dollars (and sell euros), for example, if she believes the dollar will strengthen in value and therefore be able to buy more euros in the future. Meanwhile, an American company with European operations could use the forex market as a hedge in the event the euro weakens, meaning the value of their income earned there falls.

How Currencies Are Traded

All currencies are assigned a three-letter code much like a stock’s ticker symbol. While there are more than 170 currencies worldwide, the U.S. dollar is involved in a vast majority of forex trading, so it’s especially helpful to know its code: USD. The second most popular currency in the forex market is the euro, the currency accepted in 19 countries in the European Union (code: EUR).

Other major currencies, in order of popularity, are: the Japanese yen (JPY), the British pound (GBP), the Australian dollar (AUD), the Canadian dollar (CAD), the Swiss franc (CHF) and the New Zealand dollar (NZD).

All forex trading is expressed as a combination of the two currencies being exchanged. The following seven currency pairs—what are known as the majors—account for about 75% of trading in the forex market:

EUR/USD

USD/JPY

GBP/USD

AUD/USD

USD/CAD

USD/CHF

NZD/USD

How Forex Trades Are Quoted

Each currency pair represents the current exchange rate for the two currencies. Here’s how to interpret that information, using EUR/USD—or the euro-to-dollar exchange rate—as an example:

The currency on the left (the euro) is the base currency.

The currency on the right (the U.S. dollar) is the quote currency.

The exchange rate represents how much of the quote currency is needed to buy 1 unit of the base currency. As a result, the base currency is always expressed as 1 unit while the quote currency varies based on the current market and how much is needed to buy 1 unit of the base currency.

If the EUR/USD exchange rate is 1.2, that means €1 will buy $1.20 (or, put another way, it will cost $1.20 to buy €1).

When the exchange rate rises, that means the base currency has risen in value relative to the quote currency (because €1 will buy more U.S. dollars) and conversely, if the exchange rate falls, that means the base currency has fallen in value.

A quick note: Currency pairs are usually presented with the base currency first and the quote currency second, though there’s historical convention for how some currency pairs are expressed. For example, USD to EUR conversions are listed as EUR/USD, but not USD/EUR.

Three Ways to Trade Forex

Most forex trades aren’t made for the purpose of exchanging currencies (as you might at a currency exchange while traveling) but rather to speculate about future price movements, much like you would with stock trading. Similar to stock traders, forex traders are attempting to buy currencies whose values they think will increase relative to other currencies or to get rid of currencies whose purchasing power they anticipate will decrease.

There are three different ways to trade forex, which will accommodate traders with varying goals:

The spot market. This is the primary forex market where those currency pairs are swapped and exchange rates are determined in real-time, based on supply and demand.

The forward market. Instead of executing a trade now, forex traders can also enter into a binding (private) contract with another trader and lock in an exchange rate for an agreed upon amount of currency on a future date.

The futures market. Similarly, traders can opt for a standardized contract to buy or sell a predetermined amount of a currency at a specific exchange rate at a date in the future. This is done on an exchange rather than privately, like the forwards market.

The forward and futures markets are primarily used by forex traders who want to speculate or hedge against future price changes in a currency. The exchange rates in these markets are based on what’s happening in the spot market, which is the largest of the forex markets and is where a majority of forex trades are executed.

Forex Terms to Know

Each market has its own language. These are words to know before engaging in forex trading:

Currency pair. All forex trades involve a currency pair. In addition to the majors, there also are less common trades (like exotics, which are currencies of developing countries).

Pip. Short for percentage in points, a pip refers to the smallest possible price change within a currency pair. Because forex prices are quoted out to at least four decimal places, a pip is equal to 0.0001.

Bid-ask spread. As with other assets (like stocks), exchange rates are determined by the maximum amount that buyers are willing to pay for a currency (the bid) and the minimum amount that sellers require to sell (the ask). The difference between these two amounts, and the value trades ultimately will get executed at, is the bid-ask spread.

Lot. Forex is traded by what’s known as a lot, or a standardized unit of currency. The typical lot size is 100,000 units of currency, though there are micro (1,000) and mini (10,000) lots available for trading, too.

Leverage. Because of those large lot sizes, some traders may not be willing to put up so much money to execute a trade. Leverage, another term for borrowing money, allows traders to participate in the forex market without the amount of money otherwise required.

Margin. Trading with leverage isn’t free, however. Traders must put down some money upfront as a deposit—or what’s known as margin.

What Moves the Forex Market

Like any other market, currency prices are set by the supply and demand of sellers and buyers. However, there are other macro forces at play in this market. Demand for particular currencies can also be influenced by interest rates, central bank policy, the pace of economic growth and the political environment in the country in question.

The forex market is open 24 hours a day, five days a week, which gives traders in this market the opportunity to react to news that might not affect the stock market until much later. Because so much of currency trading focuses on speculation or hedging, it’s important for traders to be up to speed on the dynamics that could cause sharp spikes in currencies.

Risks of Forex Trading

Because forex trading requires leverage and traders use margin, there are additional risks to forex trading than other types of assets. Currency prices are constantly fluctuating, but at very small amounts, which means traders need to execute large trades (using leverage) to make money.

This leverage is great if a trader makes a winning bet because it can magnify profits. However, it can also magnify losses, even exceeding the initial amount borrowed. In addition, if a currency falls too much in value, leverage users open themselves up to margin calls, which may force them to sell their securities purchased with borrowed funds at a loss. Outside of possible losses, transaction costs can also add up and possibly eat into what was a profitable trade.

On top of all that, you should keep in mind that those who trade foreign currencies are little fish swimming in a pond of skilled, professional traders—and the Securities and Exchange Commission warns about potential fraud or information that could be confusing to new traders.

Perhaps it’s a good thing then that forex trading isn’t so common among individual investors. In fact, retail trading (a.k.a. trading by non-professionals) accounts for just 5.5% of the entire global market, figures from DailyForex show, and some of the major online brokers don’t even offer forex trading. What’s more, of the few retailer traders who engage in forex trading, most struggle to turn a profit with forex. CompareForexBrokers found that, on average, 71% of retail FX traders lost money. This makes forex trading a strategy often best left to the professionals.

Why Forex Trading Matters for Average Consumers

While the average investor probably shouldn’t dabble in the forex market, what happens there does affect all of us. The real-time activity in the spot market will impact the amount we pay for exports along with how much it costs to travel abroad.

If the value of the U.S. dollar strengthens relative to the euro, for example, it will be cheaper to travel abroad (your U.S. dollars can buy more euros) and buy imported goods (from cars to clothes). On the flip side, when the dollar weakens, it will be more expensive to travel abroad and import goods (but companies that export goods abroad will benefit).

If you’re planning to make a big purchase of an imported item, or you’re planning to travel outside the U.S., it’s good to keep an eye on the exchange rates that are set by the forex market.

#forextrader #forex education #forex data #forex

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chris-sheep-berriman · 3 years ago

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Sentiment analysis is used to gauge how other traders feel, whether it’s about the overall currency market or about a particular currency pair.

Earlier, we said that price action should theoretically reflect all available market information. Unfortunately for us forex traders, it isn’t that simple.

The forex markets do not simply reflect all of the information out there because traders will all just act the same way. Of course, that isn’t how things work.

This is why sentiment analysis is important. Each trader has his or her own opinion of why the market is acting the way it does and whether to trade in the same direction of the market or against it.

The market is just like Facebook – it’s a complex network made up of individuals who want to spam our news feeds.

Kidding aside, the market basically represents what all traders – you, Warren Buffet, or Celine from the donut shop – feel about the market.

Each trader’s thoughts and opinions, which are expressed through whatever position they take, helps form the overall sentiment of the market regardless of what information is out there.

The problem is that as retail traders, no matter how strongly you feel about a certain trade, you can’t move the forex markets in your favor.

Even if you truly believe that the dollar is going to go up, but everyone else is bearish on it, there’s nothing much you can do about it (unless you’re one of the GSs – George Soros or Goldman Sachs!).

As a trader, you have to take all this into consideration. You need to perform sentiment analysis.

It’s up to you to gauge how the market is feeling, whether it is bullish or bearish.

Then you have to decide how you want to incorporate your perception of market sentiment into your trading strategy.

If you choose to simply ignore market sentiment, that’s your choice. But hey, we’re telling you now, it’s your loss!

Sentiment analysis is often used as a contrarian indicator.

There are a couple of ideas why this is.

One idea behind this is if EVERYONE (or almost everyone) shares the SAME sentiment, then it’s time to go hipster and trade against the popular sentiment.

For example, if everyone and their mamas are bullish EUR/USD, then it might be time to go short.

Why? Unfortunately, you’ll have to go further down the School to find out! Ha!

Another idea is that most retail forex traders (unfortunately) suck. Depending on where you find statistics, between 70-80% of retail traders lose money.

So if you know that these all these unprofitable traders who are usually wrong are all currently long EUR/USD….well, theeeeeen. 🤔

It might be a good idea to do the opposite of what they do!

Being able to gauge market sentiment aka sentiment analysis can be an important tool in your toolbox.

Later on in school, we’ll teach you how to analyze market sentiment and use it to your advantage, like Jedi mind tricks.

#forex education #forex data #forextrader #forex

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chris-sheep-berriman · 3 years ago

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In order to study how the price of a currency pair moves, you need some sort of way to look at its historical and current price behavior.

A chart, or more specifically, a price chart, happens to be the first tool that every trader using technical analysis needs to learn.

A chart is simply a visual representation of a currency pair’s price over a set period of time.

It visualizes the trading activity that takes place during a single trading period (whether it’s 10 minutes, 4 hours, one day, or one week).

Any financial asset with price data over a period of time can be used to form a chart for analysis.

Price changes are a series of mostly random events, so our job as traders is to manage risk and assess probability and that’s where charting can help.

Charts are user-friendly since it’s pretty easy to understand how price movements are presented over time since it’s sooooo visual.

With a chart, it is easy to identify and analyze a currency pair’s movements, patterns, and tendencies.

On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale.

Prices are plotted from left to right across the x-axis.

The most recent price is plotted furthest to the right.

Back in the day, charts were drawn by HAND!

Fortunately for us, Bill Gates and Steve Jobs were born and made computers accessible to the masses, so charts are now magically drawn by software.

What does a price chart represent?

A price chart depicts changes in supply and demand.

A chart aggregates every buy and sell transaction of that financial instrument (in our case, currency pairs) at any given moment.

A chart incorporates all known news, as well as traders’ current expectations of future news.

When the future arrives and the reality is different from these expectations, prices shift again.

The “future news’ is now “known news”, and with this new information, traders adjust their expectations on future news. And the cycle repeats.

Charts blend all activity from the millions of market participants, whether they’re humans or algos.

Whether the transaction occurred by the actions of an exporter, a currency intervention from a central bank, trades made by an AI from a hedge fund, or discretionary trades from retail traders, a chart blends ALL this information together in a visual format technical traders can study and analyze.

Types of Price Charts

Let’s take a look at the three most popular types of price charts:

Line chart

Bar chart

Candlestick chart

Now, we’ll explain each of the forex charts, and let you know what you should know about each of them.

Line Chart

A simple line chart draws a line from one closing price to the next closing price.

When strung together with a line, we can see the general price movement of a currency pair over a period of time.

It’s simple to follow, but the line chart may not provide the trader with much detail about price behavior within the period.

All you know is that price closed at X at the end of the period. You have no clue what else happened.

But it does help the trader see trends more easily and visually compare the closing price from one period to the next.

This type of chart is usually used to get a “big picture” view of price movements.

The line chart also shows trends the best, which is simply the slope of the line.

Some traders consider the closing level to be more important than the open, high, or low. By paying attention to only the close, price fluctuations within a trading session are ignored.

Here is an example of a line chart for EUR/USD:

Bar Chart

Unfortunately, this is not a chart at a bar.

A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows.

Bar charts help a trader see the price range of each period.

Bars may increase or decrease in size from one bar to the next, or over a range of bars.

The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid.

The vertical bar itself indicates the currency pair’s trading range as a whole.

As the price fluctuations become increasingly volatile, the bars become larger. As the price fluctuations become quieter, the bars become smaller.

The fluctuation in bar size is because of the way each bar is constructed. The vertical height of the bar reflects the range between the high and the low price of the bar period.

The price bar also records the period’s opening and closing prices with attached horizontal lines.

The horizontal hash on the left side of the bar is the opening price, and the horizontal hash on the right side is the closing price.

Here is an example of a bar chart for EUR/USD:

Take note, throughout our lessons, you will see the word “bar” in reference to a single piece of data on a chart.

A bar is simply one segment of time, whether it is one day, one week, or one hour.

When you see the word ‘bar’ going forward, be sure to understand what time frame it is referencing.

Bar charts are also called “OHLC” charts because they indicate the Open, the High, the Low, and the Close for that particular currency pair.

A big difference between a line chart and an OHLC (open, high, low, and close) chart is that the OHLC chart can show volatility.

Here’s an example of a price bar again:

Open: The little horizontal line on the left is the opening price

High: The top of the vertical line defines the highest price of the time period

Low: The bottom of the vertical line defines the lowest price of the time period

Close: The little horizontal line on the right is the closing price

Candlesticks Charts

The candlestick chart is a variation of the bar chart.

Candlestick charts show the same price information as a bar chart but in a prettier, graphic format.

Many traders like this chart because not only is it prettier, but it’s easier to read.

Candlestick bars still indicate the high-to-low range with a vertical line.

However, in candlestick charting, the larger block (or body) in the middle indicates the range between the opening and closing prices.

Candlesticks help visualize bullish or bearish sentiment by displaying “bodies” using different colors.

Traditionally, if the block in the middle is filled or colored in, then the currency pair closed LOWER than it opened.

In the following example, the ‘filled color’ is black. For our ‘filled’ blocks, the top of the block is the opening price, and the bottom of the block is the closing price.

If the closing price is higher than the opening price, then the block in the middle will be “white” or hollow or unfilled.

Here at BabyPips.com, we don’t like to use the traditional black and white candlesticks. They just look so unappealing.

And since we spend so much time looking at charts, we feel it’s easier to look at a chart that’s colored.

A color television is much better than a black and white television, so why not splash some color on those candlestick charts?

We simply substituted green instead of white, and red instead of black. This means that if the price closed higher than it opened, the candlestick would be green.

If the price closed lower than it opened, the candlestick would be red.

In our later lessons, you will see how using green and red candles will allow you to “see” things on the charts much faster, such as uptrend/downtrends and possible reversal points.

For now, just remember that on forex charts, we use red and green candlesticks instead of black and white and we will be using these colors from now on.

Check out these candlesticks…BabyPips.com style! Awww yeeaaah! You know you like that!

Here is an example of a candlestick chart for EUR/USD. Isn’t it pretty?

The purpose of candlestick charting is strictly to serve as a visual aid since the exact same information appears on an OHLC bar chart.

The advantages of candlestick charting are:

Candlesticks are easy to interpret and are a good place for beginners to start figuring out chart analysis.

Candlesticks are easy to use! Your eyes adapt almost immediately to the information in the bar notation. Plus, research shows that visuals help with studying, so it might help with trading as well!

Candlesticks and candlestick patterns have cool names such as the “shooting star,” which helps you to remember what the pattern means.

Candlesticks are good at identifying market turning points – trend reversals from an uptrend to a downtrend or a downtrend to an uptrend. You will learn more about this later.

There are many different types of charts available, and one is not necessarily better than the other.

The data may be the same to create the chart but the way that data is presented and interpreted will vary.

Each chart will have its own advantages and disadvantages. You can choose any type or use multiple types of charts for technical analysis. It all depends on your personal preference.

Now that you know why candlesticks are so cool, it’s time to let you know that we will be using candlestick forex charts for most, if not all of forex chart examples on this site.

Putting It Together

There are several different types of price charts that traders can use to monitor the FX market.

Keep things simple as you begin reading price charts.

As you find your chart preferences, look for the proper balance of having enough information on the chart to make good trading decisions, but not so much information that your brain is paralyzed and can’t make ANY decision.

Finding the right combination is different for every trader, so it’s important to start with the basics before you start working your way into using technical indicators (which we cover later).

#forex education #forextrader #forex data #forex

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chris-sheep-berriman · 3 years ago

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Fundamental Analysis

Fundamental analysis is one of two analysis methods that are useful when attempting to decipher markets. Whereas technical analysis attempts to understand securities through price history and volume movements, fundamental analysis aims to assess a security’s intrinsic value using external factors.

Continue reading to discover what fundamental analysis is and how it works. We look at how to use fundamental analysis in practice, covering assets classes such as forex, stocks, commodities and more.

What is fundamental analysis?

Fundamental analysis aims to uncover an asset’s intrinsic value or ‘real value’. This is a calculation of the value of the asset without factoring in market value or sentiment. Fundamental analysts use resources like financial statements, industry trends and market releases.

Once a trader has determined a security’s intrinsic value and considered other key indicators such as market sentiment, they can use that information to inform their investment decisions. When an investor has determined a stock may be under- or over-valued when measured by its fundamentals, this could be an indication to buy or sell. Sometimes, when a company's share price is considered to be too high, the company will choose to perform a stock split, thus reducing the value of its shares and this makes them more affordable for investors.

Bottom-up fundamental analysis

A 'bottom-up' approach in fundamental analysis is perhaps the most common. Whereas top-down investing focuses on the greater economy and industry before analysis of a chosen company, a bottom-up approach focuses specifically on the stock and its fundamentals. This includes cash flows, growth potential and balance sheets, as well as financial ratios. Therefore, traders that carry out bottom-up fundamental analysis tend to assume that a company can perform well in a poorly-performing market.

Understanding fundamental analysis: how does it work?

Fundamental analysis aims to determine if you should buy or sell an asset by looking at public data. Fundamental analysts can identify buy and sell signals, work out an asset's intrinsic value and analyse macroeconomic trends that could impact an asset's valuation.

Depending on which asset class you analyse, several fundamental indicators may be suitable. Interest rates can influence bonds and currencies, while factors like competitive advantage and financial ratios can impact a stock’s value. These fundamental variables can segment into quantitative and qualitative fundamentals.

Quantitative fundamentals are any variables that are measured or expressed in numbers. These fundamentals are particularly useful as you can compare securities in the same asset class or industry. Some examples for stocks are P/E ratio, revenue and current liabilities. All these quantitative values exist in a company’s financial statements.

Qualitative fundamentals are anything that cannot be measured in numbers. These fundamentals can be a country’s media presence or a company’s board of directors. These factors can be driven by opinion and are harder to compare than quantitative fundamentals.

Fundamental analysis strategy

Fundamental analysis techniques vary depending on the type of asset class that is being analysed. For example, forex market analysis is undertaken from a ‘big picture’ perspective, which means that they look at valuation factors that encompass a whole country’s efforts. Conversely, stocks look at specific valuation metrics. Their valuation is often compared to market averages to help gauge its market positioning.

Please note that fundamental analysis is usually used for stocks, but can provide useful data for all asset classes. If you are not looking at charts, then you are most likely using fundamental analysis. Fundamental analysis encompasses anything from the broad economic outlook to specific valuation metrics.

Fundamental analysis of forex

When analysing the forex market, fundamental analysts review the economic, political and social trends that could influence the supply and demand of their chosen currencies. Drawing a relationship between a variable and a currency’s value is the relatively easy part. However, analysing and understanding all the factors that make up the value of a currency pair can be a lot more complex.

The aim of fundamental analyst in forex trading is to determine if the economy is growing or shrinking. Deciphering this could expose if the currency value is set to increase or decrease. However, as forex currencies exist in pairs, analysts need to take into account one currency’s value relative to another’s value.

Key economic indicators analysed when measuring the value of forex currencies include:

Gross domestic product (GDP)

Inflation rates

Interest rates

Fundamental analysis of commodities

Fundamental analysis for commodities is based on either increasing or decreasing levels of supply and demand. Analysing the fundamentals of commodity market can provide insight into the intrinsic value of a commodity, and traders can attempt to forecast its value in the future.

However, certain commodities such as oil tend to impact other asset classes more than any other single financial instrument. Oil can have a huge impact on the global stock markets and forex pairs. This is because demand can be dictated by a nation’s economy, politics or changing industries, while supply variables can be affected by a country’s international relations and oil production. Learn more about fundamental analysis in oil trading.

Quantitative fundamental analysis factors in commodity markets include market releases and reports for commodity markets. These reports can include:

WASDA (World Agricultural Supply and Demand Estimates)

COT (Commitments of Traders)

Both of these reports provide quantitative data, which traders can use to forecast and understand a commodity market’s fundamentals.

Qualitative measures are harder to evaluate and tend to be more complex when compared to quantitative measures. Anything from trade agreements, trade wars, industry regulations and the weather forecast can impact the supply and demand of commodities.

Fundamental analysis of indices

When using fundamental analysis, stock indices are treated in a similar way to shares. This is because stock indices are a collection of shares, and share similar financial ratios. However, they are not the same as stocks. Stocks can be compared to market indices to provide a ‘big picture’ context, whereas, you can only compare indices to other indices.

For a big picture context, it is best to compare the market index to the MSCI World market index. This index covers the top 1,644 company’s stocks weighted by market cap throughout the world.

Fundamental analysis of bonds

There are two main bond markets:

Government bonds (gilts)

Corporate bonds

Gilt prices fluctuate mostly due to interest rates changes, the country’s credit rating and economic policy updates. Unlike stocks, you can measure gilts with interest rates as a primary indicator. The same goes for corporate bonds, as you must take into account the company's credit rating. A bond's credit rating is the ability of the business to pay back the bond. This means that a company’s financial health plays a big part in the value of a corporate bond.

Equity fundamental analysis

By using a company’s balance sheet, income statement and cash flow statement, investors can begin to draw a picture of a stock’s value. Fundamental analysts use stock analysis data to understand where that business is positioned in the industry, the economy and relative to competitors. This makes it easier to perform company analysis when deciding whether or not to invest in a particular share. Several types of financial ratios can help determine a stock’s valuation, which are explained in more detail in the section below.

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chris-sheep-berriman · 3 years ago

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chris-sheep-berriman · 3 years ago

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chris-sheep-berriman · 3 years ago

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