Forex Trading Using Fundamentals

Are you interested in using fundamentals to trade Forex but have no idea where to even start? This article will set you on the right track by explaining 3 different approaches to trading fundamentals in Forex: News trading, interest rate approach and geopolitical trading.

If you are not familiar at all with fundamentals and are left confused, then check out these articles for knowledge on the topic:

1. News trading

In the Forex market economic data is released frequently, this news affects the exchange rates of the relevant currencies. This presents an opportunity for a trader to analyse the information and, if the odds are in their favour, place a trade based on their observations.

Which major news releases are the best for trading?

  • Interest rate decisions.
  • Employment statistics.
  • Gross domestic product (GDP).
  • Consumer price index (CPI).
  • Producer price index (PPI).
  • Consumer sentiment/ retail sales.
  • Trade balance.
  • Reserve bank policy changes/ meetings.

 

But how do you trade this information?

Before a news release, the market has an expectation of the data and how it will affect the currency, this is known as the forecast which is already priced into the market. Once the actual release occurs, if there is a substantial difference between the forecast and the actual news, then large moves can result. This differential can be positive or negative for a currency.

You can then position yourself based on the reaction to the news e.g. if the Federal Reserve was expected to raise interest rates (which is positive for the USD) but instead the interest rate is cut (negative for the USD), traders are likely to sell the US dollar, therefore, you can profit from this by selling the USD against a strong currency and joining with the momentum.

 

You can find information about news releases including the schedule, forecast, and actual releases at:

 

It is important to mention that to be a successful news trader, you shouldn’t trade every event, a news trading approach is only consistently profitable if you trade when there is a large difference between what the market was expecting and the actual results. Also, trading news releases in this manner is suited to short- and medium-term trading, the combination of all economic and geopolitical factors drives the market over the long term.

2. Interest rate approach

The next way to trade fundamentals in Forex is to use interest rates to rule decisions, interest rates are generally the main fundamental factor in determining sentiment. A higher interest rate is bullish for a currency and a lower interest rate is bearish for a currency.

Forex involves trading the exchange rate of two currencies. Therefore, to use this approach, buy a currency with increasing interest rates vs a currency with decreasing interest rates e.g. if the US is increasing rates and Canada is decreasing them, then buy USDCAD.

You must keep in mind that if you do not time entries using technical analysis or other ways, then the market may go significantly against you in the short term because interest rates have a longer-term pull-on price. 

To showcase this approach, below we see a chart of USDJPY. This chart shows a time when the BOJ started talking about quantitative easing, and then later implemented it. Quantitative easing decreases interest rates, which we mentioned is negative for a currency. Using the interest rate approach, you could have bought USDJPY, expecting that the Yen would decline in value. As shown on the chart USDJPY went up significantly during this time and this approach would have resulted in a profit.

 

Interest rate approach – USDJPY Weekly

3. Geopolitical trading

This approach is less frequent and harder to gauge; however, the resulting moves can be huge. What it entails is trading in the direction of momentum when events occur on a global scale, these occurrences are outside economics and can include political elections, wars, trade wars, natural disasters, and diseases.

It is difficult to determine how market participants will react beforehand, however, the initial reaction and sentiment towards these out of the ordinary events usually occur for long periods. Presenting an opportunity to join a potential long-term trend.

Ok, but how do you trade this way? When there is a major event in one of the categories mentioned, the exchange rate of a currency pair will react negatively or positively, if this initial reaction is sustained with strong signs of momentum then you should position yourself in this direction. As discussed, during out of the ordinary occurrences, moves are usually sustained for long periods and a lot of money can be made.

How the market reacts is dependant on how the event will affect the relevant currency’s economy. The next example shows a chart of GBPUSD when the UK voted to leave the EU. Participants knew that Brexit was negative for the UK economy, therefore GBP weakened, and the move continued. A fundamental Forex trader could have sold the GBP in this case after weighing all the considerations.

 

Political example- GBPUSD Daily

 

Next, we can look at another out of the ordinary event in the Forex markets, the impact of a disease on market prices. Currently, the world is battling a pandemic, COVID 19, the disease is bad for the global economy but even worse for emerging market currencies since these countries’ economies are more fragile.

To show this, next is a chart of USDZAR. A virus will hit emerging markets the hardest, therefore using this approach, you can sell emerging markets currencies against the currencies of larger economies.

 

Disease example- USDZAR

 

If you are still deciding on your trading methodology, then read Fundamental’s vs. Technical’s to help you make the correct choice.

 

Should you be interested in fundamental trading then employing the 3 approaches covered in this article is a great way to get started. Remember the distinctions in the timeframe for each approach and follow the guidelines religiously.

 

Enjoy the research, enjoy the trading.

This website uses cookies for optimal performance. By continuing to use this website you agree to the Privacy Policy