Trading Forex with Fundamental Analysis and Economic Calendar

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Fundamental Analysis & Economic Calendar

Money as we know it means different things to different people. For some, it is a means to an end, for others, it is a symbol, it shows a status. For traders, money is the base of speculation. The fundamental analysis is a way to understand money and Forex in a better way by approaching economies. Have an idea about a falling or an uprising economy? This makes currencies appreciate and depreciate. Trade it and make money as a fundamental trader!

Money represents “something” we pay or receive for goods we need or others need. Throughout history, money took various shapes. From gold and silver coins to today’s banknotes and numbers in a bank account.

The value of the money is what attracts people, not its quantity. The more, the better, doesn’t work in this case, but the more valuable, the better.

For Forex traders, money represents pips. A pip is a difference between the ask and the bid price of a currency pair.

The more pips a trader makes, the better. Moreover, the value of a pip shows the value of money based on the volume traded.

We live in a world where fiat money is the backbone of the global financial system. On the other hand, central banks control fiat money. This makes central banks actions the cornerstone for money movement.

When money (currencies) move, the Forex market moves. The art of speculation, or trading, depends heavily on these movements, also called volatility spikes.

Probably the biggest influence in the way currencies (money) move is in the central banks’ power. Therefore, traders make use of anything possible to anticipate the moves of a central bank.

There’s no better tool for that than the economic calendar. Fundamental analysis in Forex trading strongly depends on the economic trading calendar.

Introducing the Forex Economic Calendar

Fundamental analysis is the twin sister of technical analysis. There’s no way to ignore it when making a trading decision.

Technical analysis shows where a currency pair goes, but there’s a reason for that move. That reason is part of Forex fundamental analysis.

The FX news calendar is a listing of the economic events that influence currencies. Because traders know in advance when the economic news “hits the wires,” they position for it.

Any trader should know the economic news for the period ahead because it is free information. A simple Internet search for “economic calendars” or “world economic calendar Forex” offers the same information.

To trade the Forex market in any trading week without knowing the news is foolish. Can you drive a car without seeing the road?

The calendar shows news from the most important (developed) economies that influence the Forex market. News from the United States, Eurozone, United Kingdom, Japan, Australia and New Zealand are key.

Currencies of those countries/regions (USD, EUR, GBP, JPY, AUD, NZD) form the Forex dashboard. If you combine the currencies, the Forex dashboard appears.

Forex Dashboard MT4

The currency pairs listed above, move based on the events listed Forex economic news calendar. When released, volatility rises. As a result, speculating on a currency pair’s move is possible.

Explaining the Forex Economic News

The economic news influences markets throughout the trading day and week, and even over the weekend. While the actual Forex market closes for the weekend, important events may influence Monday’s opening.

Such events may be Chinese data (typically comes out on Sundays) or economic summits, etc. and are part of the economic calendar. Even political and geopolitical events, like referendums and G20, etc., meetings are an important part of the calendar.

Forex Economic Calendar Indicator

Image of ForexFactory

The typical structure of any Forex market calendar looks like the one above. From left to right, the data to consider is the:

  • Date of the release. This is the actual day the news hits the wires.
  • The exact moment the news comes out. Considering algorithmic trading and high-frequency trading, the time of the news must be impeccable.
  • Currency affected. Each piece of data corresponds to a country/economic area. Therefore, that currency moves on the release.
  • Impact expected. The Forex trading calendar shows the relevance or importance of the released data. The red news is the most important economic news Forex market considers.
  • Actual, Forecast and Previous data. The actual data is the one that matters. The more it differs, the bigger the volatility in the market will be.

There’s one more column called Detail. This one shows what every piece of economic data means and why it is important as a Forex economic calendar indicator.

Forex Fundamental Analysis Indicators

Image of ForexFactory

Let’s have a look at the example above. The red color signals an economic event at 08:30 am (time varies depending on the time zone used).

The data refers to the Canadian economy, thus affecting the Canadian Dollar (CAD). Trade Balance is the name, and the forecasted value is CAD0.3 Billion for the month of May 2017.

It represents the difference in value between imported and exported goods during the reported month. Hence, the bigger the data, the better for the currency.

The frequency, historical data, the next release data and other details give the overall picture of the news. Such information exists for any news part of the fundamental analysis of Forex market.

What Truly Matters?

Not all data in the economic calendar matters, though. Traders focus on having an educated guess about what the central bank will do next.

Central banks meet regularly (every month or every six weeks) to set the interest rate on currency. Together with the interest rate, the overall monetary policy moves the Forex market.

Trading is a game of probabilities. And in most of the times the market moves based on future expectations rather than the actual news.

Between two central bank meetings, traders buy or sell currencies on future monetary policy expectations. Anything else is secondary.

Red News

The red economic events are the ones that move the market. The rest of the data is secondary in importance.

In the order of their importance, such events are:

  1. Central banks meetings – Monthly or every six weeks, central banks meet to set the interest rate.
  2. In the Forex market calendar, inflation is the Consumer Price Index (CPI). The higher the inflation, the higher the interest rates will be. The opposite is true as well. Therefore, volatility is at its most elevated levels when inflation differs from the forecast.
  3. Jobs data – In the United States jobs data is part of the Federal Reserve (the Fed)’s mandate. The unemployment rate and the Non-Farm Payrolls releases move markets aggressively.
  4. PMI’s – The PMI stands for Purchasing Manager Index and has different names across the world. In the US, the ISM Manufacturing and Non-Manufacturing releases are the equivalents of European PMI’s. The release shows the health of economic sectors. Strong releases are bullish for currencies.
  5. Other news/events like:
    • GDP – Gross Domestic Product shows the total value of goods and services in an economy. The bigger, the better for the economy and its currency.
    • Personal Consumption – Consumers’ health is vital for an economy. Disposable income, wave evolution, etc. matter for central banks when setting the interest rates.
    • Retail Sales – Money needs to keep moving for the economy to grow consistently. Retail sales are the perfect indicator for the state of an economy.
    • Press conferences – Central bankers hold press conferences, speeches, interviews, etc., trying to communicate their position on monetary policy. Moreover, they reinforce the central bank’s stance.

Above is the important fundamental analysis of Forex market. Traders focus on the red events and on what they tell about future monetary policy.

Central Banks Mandates

What a central bank does with the interest rate on a respective currency is vital for that currency. For this reason, traders should focus on central banks’ role in the Forex market.

The most important central banks are:

  • Federal Reserve of the United States (Fed). This is THE central bank in the world, as it sets the interest rate on the world’s reserve currency, the U.S. dollar.
  • European Central Bank (ECB).
  • Bank of England (BOE).
  • Bank of Japan (BOJ).
  • Reserve Bank of Australia (RBA).
  • Reserve Bank of New Zealand (RBNZ).
  • Bank of Canada (BOC).
  • Swiss National Bank (SNB).

All of them have a mandate and set the monetary policy based on it. The pillar of their mandate is inflation.

A classical mandate sounds like this: to keep inflation below or close to 2%. However, there is one central bank that has a dual mandate: The Federal Reserve of the United States.

Besides inflation, the Fed’s mandate is to create jobs too. It is no wonder now why the jobs data in the United States, namely the NFP number is crucial for the dollar.

How to Trade Forex Using Fundamental Analysis

The best way to interpret economic news is to have a trading plan for the week/period ahead. Knowing what data follows is a great advantage ahead of the market.

The problem is that everyone looks at the same data. Yet, not everyone makes money in the Forex market.

One way to succeed is to use the FX trading calendar correctly. Keep in mind that fundamental analysis in Forex trading is as important as technical analysis.

ECB and Inflation

Everyone knows these days that the ECB has a problem with inflation in the Eurozone. More exactly, with the lack of it.

As part of the ECB’s mandate, a normal inflation should hover around 2%. In this relation, levels of 1.8% or 2.2% are enough for a steady economic growth.

Higher inflation levels lead to the central bank raising rates. Contrary, lower inflation results in the central bank cutting rates. Higher rates mean a higher currency, while lower rates are bearish for a currency.

It is clear now why inflation is so important for the central banks. Hence, it is one of the most important Forex fundamental analysis indicators.

Fundaental Analysis in Forex

The end of October 2013 saw the inflation in the Eurozone unexpectedly falling. As per the economic calendar, the expected or forecasted value was 1.4%.

However, the actual number came at 0.8%. Before moving forward, please refer to the mandate of a central bank: to keep inflation below or close to 2%.

Such a release was far, far away from the ECB’s mandate. Hence, market participants started to sell the Euro in a frenzy. Why?

Because part of the fundamental analysis of Forex market is to trade expectations. In this case, based on the inflation data, expectations grew that the central bank will cut rates at the next meeting.

Cutting rates are bearish for a currency and sellers step in. So they did, as the chart above shows.

The next ECB meeting was after two weeks and traders sold the Euro on rate cut speculations. This is how the economic calendar Forex influences trading decisions.

For the next two weeks, all Euro pairs suffered across the dashboard. No other news part of any economic calendars mattered anymore.

The ECB did deliver. The central bank cut the interest rate, and the EURUSD dropped like a rock: two hundred pips in a few minutes.

However, the lows in that day turned out to be the lows for a long period ahead. The explanation comes from the press conference.

A press conference follows forty-five minutes after every ECB meeting. The President reads the statement, and press representatives ask questions.

During the press conference, the ECB President (Mario Draghi) supported the rate cut. However, he added that the ECB expects inflation to pick up next year.

Understanding Fundamental Analysis in Forex

Because of that message, traders focused, yet again, on expectations. It turned out that was the low on the EURUSD pair for quite some time moving forward.

It didn’t matter that the next day the NFP in the United States came better than expectations. So, bullish for the U.S. dollar.

Traders simply disregarded the data and before you know the pre-ECB highs disappeared. So powerful the fundamental analysis in Forex is.

High-Frequency Trading

Part of understanding the fundamental analysis Forex market moves upon is to know the players. Who’s responsible for the sudden spikes or dips in a currency pair?

Retail traders represent less than six percent of the Forex market. The rest are big commercial banks, Forex brokers, liquidity providers, investment funds, and so on.

The last decades brought a shift in the trading industry. Technological advances made room for one of the most powerful industries of them all: High-Frequency Trading (HFT).

HFT stands for algorithmic trading. Super-computers or trading algorithms buy and sell a currency/currency pair thousands of times per second.

The Forex calendar news is the reason why these robots trade. They buy or sell based on the difference between the actual and forecast value of the economic calendar Forex news.

Buying or selling happens in a blink of an eye. This is why the market moves so aggressively. This happens in less than a second after the economic calendar FX news comes out.

Forex Economic News Calendar Results

The chart above is only an example of how a Forex fundamental analysis strategy might work. While the U.S. Presidential elections and the 1st round of the French elections were difficult to interpret, the Fed’s rate hike wasn’t.

The best Forex fundamental analysis is the result of adjusting your positions to the central banks’ monetary policy. Instead of following a technical trend, traders follow a fundamental one after they learn Forex fundamental analysis.

Not Familiar with Algorithmic Trading ?

Since we talk about algorithmic trading, if you are a beginner, you are probably wondering what is this. The algo trading  is a way to bring forex trading to the next level. Although it sounds complicated, this matter could also be approached from a beginner’s point of view. In this relation, I should let you know that Kirill has prepared a special video that explains algorithmic trading and the way it works in Forex. You should simply add your details and you will be able to play the video for FREE!

 

I strongly advice you have a look at this video if you want to be introduced to algorithmic trading. Don’t worry if you think that you are too much of a newbie. Kirill has created it to be easy to understand even from people that have not been dealing with algorithmic systems or MetaTrader 4 programming.

Conclusion

Central banks are the ones that dictate the value of money. Any piece of economic data is important. Especially the one that gives an idea about what a central bank might do next.

Any speech, interview, red economic event or not, matter. Understanding fundamental analysis in Forex means to stay aligned with the central banks’ monetary policy decisions.

This way, you’re on the safe side and chances to profit from market moves increase. There are other trading calendars to consider, though.

The dividends calendar for the stock market is one example. Or the earnings calendar too.

While they do not refer to the Forex market, there is a correlation that affects currencies too.

Fundamental analysis is part of the decision-making process of buying or selling a currency pair. Together with technical analysis, they show the reason why the market moves and where it goes.

One cannot tell which is more important. Technical analysis shows support and resistance levels. Targets for the next trade, together with stop loss levels. The fundamental analysis puts a reason behind a move. Therefore, traders should consider them both to make profit.

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Damyan Diamandiev
Damyan Diamandiev

Damyan is a fresh MSc International Management from the International University of Monaco. During his bachelor and master programs, Damyan has been working in the area of financial markets as a Market Analyst and Forex Writer. He is the author of thousands of educational and analytical articles for traders. When being in bachelor school, he represented his university in the National Forex Trading Competition for students in Bulgaria and got the first place among 500 other traders. He was awarded a cup and a certificate at an official ceremony in his university.

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