The constituent elements of fundamental analysis |
The price ratio of a particular currency pair is directly influenced by information about the economic indicators of countries, and not necessarily those to which these pairs refer. That is, information about the crisis in Canada can indirectly affect the dollar currency pair. USA / franc, because Canada is a trade partner of the USA, which means that the crisis in this country may affect the USA as well. An experienced broker, let alone a beginner, cannot always follow, let alone understand, international, economic or social news, therefore, for the convenience of conducting trading operations, a calendar was created as a hint to the broker.
Economic calendar – one of the main elements of fundamental analysis, contains a list of all dates for the current trading year in which an event occurs that affects the rate fluctuation. In other words, here you will see on what day, in which country the publication of economic indicators takes place, in which country which national holidays are expected (which is relevant for a short-term strategy), comparative values of indicators in relation to the previous period.
Understanding the main indicators… The second important component of fundamental analysis. It is logical that there is simply no time to cover all the indicators, therefore, if you are aimed at working with a certain currency pair and apply certain methods of technical analysis, then you are clearly aware of which indicators are paramount for you. For example, the GDP indicator or inflation rate of a country is essential for long-term strategies, but the industrial production index can influence transactions in shorter periods.
Indicator types… Economic indicators can be either main, that is, leading, or lagging. The first type of indicators has a strong influence on expectations, that is, they are the basis for modeling the trend of the behavior of a currency pair. That is, if the discount rate of a country was greatly raised by the Central Bank, then one can expect an inflow of funds into the economy of this country, that is, in fact, the value of the national monetary unit was raised. Lagging indicators confirm the emerging trend. On the one hand, an increase in the discount rate is positive information, on the other, it can be a signal for the collapse of the economy. And a weak indicator like the industrial price index can confirm or deny an uptrend forecast.
Revision of data. This component of fundamental analysis is overlooked. Ignoring information about the revision of data from the past can lead to self-deception. For example, you receive information that the indicator grew by 1% in the reporting period. You build your strategy with the expectation that there has been an improvement, but you lose sight of the fact that the data for the previous period has been adjusted upward, for example, by 3%. From this perspective, a 1% rise turns out to be a fall.
Today, in a nutshell, we examined the main components of fundamental analysis. We hope we helped you a little, and now your trading will be even more productive. Good luck and stay tuned for our new publications!