The forex trader today is very lucky. The Internet provides unprecedented access to information and data—perhaps too much information. A good technique to use that provides an efficient way to pull information out of the World Wide Web is to use the search engines and input the right terms.
For example, as the trader preparesto evaluate a currency to trade, he or she should also scan the latest news. Here is how todo it:
- Go to Google, click on the News link and then click on Sort by Date.
- Input search terms (U.S. dollar, Australian economy, etc.).
For example, if you input the term Australian interest rates, the results will quickly point to the latest article on it.
Using Google or any other search engine effectively will depend on which terms are entered. The trader should enter a variety of terms to maximize the items retrieved. Here are some useful terms to start with:
- U.S. dollar
- U.S. economy
- U.S. interest rates
- Bloomberg on U.S. Dollar
- European economy
- European interest rates
- German economy
- German interest rates
- Zhou Xiaochuan
- Bank of China
- Australian interest rates
- Australian economy
- Canadian economy
- Canadian interest rates
- Governor Dodge
- Bank of Japan
The idea is to search for the latest analysis while you are scanning the charts, which will help you gain an understanding of what forces are moving the charts while you trading.
Developing a fundamental outlook is part of the evolution of a forex trader. When you first begin trading, the focus tends to be on technique and tactics because learning how to put on the trades and how to read the charts is the most important task at hand. But as a forex trader develops an understanding of the fundamentals, he or she will eventually ask the following two questions:
- What currency pairs should I be trading?
- What direction is my next trade?
It is helpful to be able to group currencies by their fundamental personalities. We can see that some currencies are stronger than others and that some currencies are fundamentally at extremes; those groups become more interesting to trade.
A fundamental view leads to the understanding that the major causes of change in the relative value of currencies are real or perceived changes in interest rates, inflation, or economic growth between their economies.
The relationship between fundamentals and forex prices is not a direct relationship; rather, it is more akin to fuzzy logic or a chemistry of forex.
Fundamentals remain in the background and provide important conditions conducive to a currency’s strengthening or weakening. By forming a fundamental view of currencies, the trader is able to get in line with the powerful economic forces that currencies ultimately reflect.
To guide traders in conducting their own fundamental analysis, they need to have their own fundamental forex checklist and action plan.
The purpose of the fundamental forex checklist is to make sure you have the information to make some trade strategy decisions. Fundamental Forex Checklist and Action Plan
- Scan and list current global data on gross domestic product (GDP), interest rates, and inflation levels.
- Scan price patterns in commodities such as oil, gold, copper.
- Review the Trade-Weighted Index (TWI) of each currency to determine if any are probing key support or resistance.
- Check the U.S. Dollar Index (USDX) at www.ino.com and compare it to the TWI of the U.S. dollar.
- Scan global interest rates and try to group currencies by:
a. Countries expected to raise rates
b. Countries expected to keep rates the same
c. Countries expected to lower rates
- Choose which currency pairs to trade.
- Choose the preferred direction of your next trade. If you do not have a preferred direction, that means you are choosing to trade in either direction.
- Watch the calendar for economic releases.
Prepare your own Fundamental Outlook Report
Here is a sample:
Fundamental Outlook Report on the Currency Pair (−−−−−−−−) The CURRENCY PAIR is in a strong position fundamentally because its economy is experiencing growth at a GDP rate of (−−−−−−−−) per year. Its inflation rate is now at (−−−−−−−−). The central bank has indicated (1) a bias toward increasing interest rates; (2) a neutral stance on interest rates; (3) concern on slowdown of the economy. The Trade-Weighted Index has shown a trend (up) or (down).
The biggest risk factor for this currency pair is:
- Unexpected rise in inflation
- Further slowdown in housing
- Direction of oil prices, etc.
In other words, put in your own words a summary of what’s going on with the fundamentals affecting the currency that you are looking to trade.