How To Get Started With Fundamental Analysis (part 1 of 4) — Transcript

Full transcript

1. 0:00(gentle music)
2. 0:02- [Narrator] In this video, we will explain
3. 0:03what fundamental analysis is
4. 0:05and how you can start to get
5. 0:07to grips with it in your trading.
6. 0:11We will also include a step by step guide
7. 0:13that will help you begin to interpret news and analysis
8. 0:17into clear trading opportunities.
9. 0:19To illustrate how fundamental analysis applies
10. 0:22to the trading routine of most professionals,
11. 0:24we can use the example of driving a car.
12. 0:2780% of driving is done by looking through the windows
13. 0:30and reading the signs to tell us where we are heading
14. 0:33and how to drive.
15. 0:3520% is about using the mirrors
16. 0:37at important times to avoid accidents.
17. 0:41Imagine the result if you tried to drive
18. 0:43your car using the rear view mirrors 100% of the time.
19. 0:47This is effectively what you are doing
20. 0:49when trying to trade solely off a price chart.
21. 0:52In the world of retail trading education
22. 0:54there are many myths concerning fundamental analysis
23. 0:57and the trading of news.
24. 0:59For example, many people feel
25. 1:01that fundamental analysis is complicated
26. 1:04or reserved only for those
27. 1:05who have specialist degrees in finance.
28. 1:08Other people believe that trading around news events
29. 1:10is highly unpredictable and dangerous.
30. 1:12And some people are told that all information
31. 1:15is perfectly priced into the markets at any given time.
32. 1:20These are all retail trading myths
33. 1:23and one of the best ways to see how this
34. 1:25is the case is to simply watch the price
35. 1:27of major currencies as a major economic event is released.
36. 1:32You will often notice that the price moves
37. 1:34almost instantly in reaction.
38. 1:39These moves are the direct result
39. 1:41of professional traders waiting for these releases
40. 1:43and taking action immediately.
41. 1:46They do not hide or avoid these events,
42. 1:48in fact they are often the highlight of the week
43. 1:50for most professional trading floors.
44. 1:54If this is how professional traders operate,
45. 1:56then it gives us a clue to the importance
46. 1:58of fundamental news and analysis.
47. 2:02Later in this course we will also demonstrate
48. 2:04how news and fundamentals very often take months
49. 2:08and even years to be fully priced in.
50. 2:11This is very easy to prove and we will use
51. 2:14a real-life example on a major currency.
52. 2:19After you see for yourself how simple
53. 2:21and effective the fundamentals can be,
54. 2:23you will then be ready to understand exactly
55. 2:25how you can start using them to vastly improve your trading.
56. 2:29So how can you begin conducting some basic
57. 2:31fundamental analysis now and what do you need
58. 2:34to be watching out for?
59. 2:36When trading currencies, everything revolves
60. 2:38around the central bank of the relative country.
61. 2:41A central bank is responsible
62. 2:43for the economic stability of each nation.
63. 2:46Famous examples of central banks
64. 2:48that you may have heard of include the Bank of England
65. 2:51and the Federal Reserve in the United States.
66. 2:54Each central bank has a mandate.
67. 2:56This is just a selection of targets for the overall economy.
68. 3:00These targets generally revolve
69. 3:02around how many people are employed,
70. 3:03how fast the economy is growing
71. 3:06and how quickly prices are rising
72. 3:07for normal everyday people doing their shopping.
73. 3:11To help them make sure that the economy
74. 3:13is working in a way that will keep to their targets,
75. 3:15they monitor the economic data that is released
76. 3:18on a regular basis and then try and use that data
77. 3:21to spot trends in the economy.
78. 3:24When they see a trend forming
79. 3:25that they don't like the look of,
80. 3:27they will use some of the special tools
81. 3:28at their disposal to fix it.
82. 3:33The process of the central bank is fairly simple:
83. 3:36They set their targets.
84. 3:38They monitor the economic data.
85. 3:40They implement their tools when they see the need to.
86. 3:44So how does this help you as a trader?
87. 3:46It is the use of those tools
88. 3:48that causes currency prices to move.
89. 3:50The most common tool used by central banks
90. 3:53around the world is that of interest rate adjustments.
91. 3:56Once way in which they can adjust interest rates
92. 3:58to improve the economy is when people
93. 4:00start saving their money instead of spending it.
94. 4:04When this happens the economy starts to slow
95. 4:06as fewer people are buying and selling.
96. 4:10As the economy slows down more people stop spending
97. 4:13and it gets harder and harder to make money.
98. 4:16The worry of not being able to make money
99. 4:18then leads more people to cautiously save the money
100. 4:20they do have, thus growing the problem.
101. 4:23To nip this in the bud quickly,
102. 4:25the central bank will lower its interest rate.
103. 4:28This is the rate used by all commercial banks
104. 4:30as a guide from which to pay its savers
105. 4:32and charge is borrowers.
106. 4:34By suddenly having a lower rate,
107. 4:36it makes saving money much less attractive
108. 4:39because people get no reward.
109. 4:41It also encourages people to take more risk
110. 4:43and borrow money which they then use
111. 4:45to buy houses or start up new businesses.
112. 4:48This gets the money flowing and people become
113. 4:50confident that they will be able to make money again.
114. 4:54This confidence leads to further spending
115. 4:56which gets the overall economy back on track.
116. 4:59Each time the bank implements their tools in this way
117. 5:02it has a powerful effect on the value of their currency.
118. 5:05The example we just looked at, lowering interest rates,
119. 5:09would also reduce the value of the related currency,
120. 5:12sending the price plummeting.
121. 5:14The reason is that investors would suddenly
122. 5:16have no benefit of saving or investing their money
123. 5:19in that country.
124. 5:20The interest they were previously being paid is now gone.
125. 5:24Instead they cash out and move their funds
126. 5:26to another country where interest rates
127. 5:29are more attractive and they will get a better return.
128. 5:33Part of this process involves changing
129. 5:35that money from the local currency
130. 5:37into the currency of the new country.
131. 5:41They are in effect selling the local currency
132. 5:44to buy the new one.
133. 5:46This selling of the currency causes the price to drop.
134. 5:49Imagine the advantage you would have
135. 5:51if you knew how all of this worked
136. 5:53and began selling that currency just before
137. 5:56the rest of the market and the larger investors
138. 5:58had had a chance to do this?
139. 6:00This is where understanding and trading
140. 6:02the fundamentals will make you money.
141. 6:04Let's look in a little more detail how all of this works
142. 6:07and how you can start learning and applying it today
143. 6:09to improve your trading results.
144. 6:11As we know it all starts with that economic data.
145. 6:16But instead of being mysterious numbers
146. 6:18that have a totally random impact on the markets
147. 6:21they can in fact be followed,
148. 6:22interpreted and even predicted in the right circumstances.
149. 6:27So what are these economic data points
150. 6:29and what do they tell the central bank
151. 6:31and us about the economy?
152. 6:33The main ones can be broken down
153. 6:34between production indicators
154. 6:36which show what the country is making.
155. 6:39Employment which show how the workforce is performing.
156. 6:43Growth, which show how fast and at what rate
157. 6:46the economy is expanding or shrinking.
158. 6:49Inflation which show the rate at which prices
159. 6:51of every day goods and services are rising or falling.
160. 6:55And finally geopolitical which isn't directly related
161. 6:59to the economy but can potentially have a huge impact,
162. 7:02for example if a country goes to war
163. 7:05or if an anti-business government is elected,
164. 7:07then this can cause problems that the central bank
165. 7:10might have to contend with.
166. 7:12When these indicators point to action
167. 7:13being needed from the central bank,
168. 7:15then this will move currency prices
169. 7:17as traders try and get into position
170. 7:19to ride the moves for as much as they can.
171. 7:23This race to catch the next big move
172. 7:25is generally what is moving currency prices
173. 7:28on a daily basis as professional traders constantly analyze
174. 7:32the economic data and try to predict
175. 7:34when the central banks will act next.
176. 7:37Very often the moves caused by the speculators
177. 7:40create opportunity in itself.
178. 7:43If you learn to recognize things that the market
179. 7:45might be paying attention to
180. 7:47or something that has historically caused
181. 7:49traders to buy and sell
182. 7:50then this is an opportunity to take advantage of
183. 7:53just like the anticipated moves
184. 7:54caused by the larger investors moving their capital
185. 7:57in and out of the country over the longer term.
186. 8:02This is why news is never fully priced in instantly.
187. 8:06Sometimes it just takes a while to move
188. 8:08huge amounts of money around,
189. 8:09and this drags out the time it takes
190. 8:11for things to ever be fully priced in.
191. 8:16This brings us to the tools themselves
192. 8:17that the central banks use.
193. 8:19The main tools used are interest rates
194. 8:21as we have already looked at.
195. 8:23The banks also use price caps,
196. 8:25which is when they decide to keep the value
197. 8:27of their currency at a specific price level
198. 8:29against another currency.
199. 8:31An example of this is on the Euro Swiss currency pair
200. 8:34between 2013 and 2015 when the central bank of Switzerland,
201. 8:38the SNB, decided to hold the value of the Swiss Franc
202. 8:42against the Euro at 1.20.
203. 8:44Even though the market wanted to sell that pair lower,
204. 8:47it couldn't because the bank would literally print money
205. 8:50to absorb all of the sell orders.
206. 8:52This was one battle that the market knew it couldn't win.
207. 8:56This was a powerful tool and traders knew
208. 8:58that when the price hit that 1.20 level
209. 9:00there would be renewed buying from the bank
210. 9:02and that it would rise back from it.
211. 9:05The power of the banks floor was demonstrated
212. 9:07when they removed it in 2015.
213. 9:10The price fell over 10,000 pips
214. 9:12in a matter of minutes as the markets scrambled
215. 9:15to take advantage of the removal of this tool.
216. 9:18Another tool used by central banks is that of language.
217. 9:21This simply involves trying to convince the market
218. 9:24that they will do something if needed
219. 9:26in the hope that the markets believe them
220. 9:28and start trading as if that action had been taken.
221. 9:31For example, if a bank would like the value
222. 9:33of a currency to be lower but doesn't want
223. 9:35to actually lower interest rates,
224. 9:37then it could tell the market that it will act
225. 9:39unless the price falls.
226. 9:41If the market believes the bank,
227. 9:43then very often it will oblige and sell the currency,
228. 9:46thus giving the bank its desired effect
229. 9:48without them having to actually do anything.
230. 9:51These messages are delivered
231. 9:52through regularly scheduled statements
232. 9:54that the banks all host.
233. 9:57It is not hard to figure out what the banks are thinking
234. 10:00because they go to great lengths to actually tell us.
235. 10:03There are many other tools that banks can use
236. 10:06but these are the most common.
237. 10:08And in the years after the financial crisis
238. 10:10they also started using a new tool
239. 10:12called quantitative easing.
240. 10:14This is where they print money
241. 10:16and flood the economy with that new money.
242. 10:18The goal is to reduce the value of the currency
243. 10:21while also stimulating the economy.
244. 10:23So traders are constantly looking
245. 10:25for any signs that a central bank
246. 10:27may be about to use one of these tools
247. 10:29and then they will try and trade that
248. 10:31ahead of everyone else.
249. 10:33The earlier they can enter the more of the ensuing move
250. 10:36they will catch and profit from.
251. 10:38Your job as a trader is be aware of what is going on
252. 10:41and then figure out what the central bank
253. 10:43is likely to do next with its monetary policy.
254. 10:47If it is likely to take action
255. 10:48that will devalue its currency
256. 10:50then we would be looking to sell it.
257. 10:52If it is taking action to increase demand
258. 10:54and therefore the value of its currency,
259. 10:57then of course we would be looking to buy it instead.
260. 11:01This constant cycle of economic data
261. 11:03and the central banks reactions is never ending
262. 11:06and is what provides unlimited opportunities
263. 11:08for currency traders all over the world
264. 11:11that understand what is going on.
265. 11:14There is no need to try and follow every analyst
266. 11:16or be watching every single movement
267. 11:18of all of the currency prices.
268. 11:21The only thing you need to be aware of
269. 11:23is what each major central bank is doing
270. 11:26and how the market is expecting that to impact the currency.
271. 11:29Once you become proficient at this process
272. 11:31you will start to see many opportunities
273. 11:33to make money from your ongoing analysis
274. 11:36across the major currency pairs.
275. 11:38You can get started with this right away
276. 11:40and see for yourself just how connected
277. 11:42the economic news is with the movement
278. 11:44seen in currency prices.
279. 11:46To do this you can follow a simple four step guide
280. 11:49that we will walk you through now.
281. 11:52Before you can apply the four steps you need to know where
282. 11:55to find the necessary news and information.
283. 11:58There are many freely available resources
284. 12:00that you can start using right away.
285. 12:02These will help you start using fundamental analysis
286. 12:05even if you have no experience in it until now.
287. 12:08Below this video there are some links
288. 12:09to the most popular websites
289. 12:11that regularly provide news and analysis articles
290. 12:14that we can use to find trades.
291. 12:16The following four step guide can be applied
292. 12:19on any of these sites when reading the articles
293. 12:21that you find there.
294. 12:23If you cannot apply each and every step
295. 12:24to the information that you are reading,
296. 12:26then you should abandon that particular piece of information
297. 12:29and find one that does contain each of the four steps.
298. 12:32Step one, which currency is it talking about?
299. 12:36When reading a piece of fundamental news
300. 12:38or analysis the first thing you need to find
301. 12:41is which particular currency is it talking about.
302. 12:44This will usually be in the headline
303. 12:46or in the first few lines of text.
304. 12:48Step two, which direction is the currency moving in?
305. 12:52Now you know which currency the news is moving
306. 12:54your next step is to find out which way
307. 12:56it is expected to move next.
308. 12:58This should again should be in either the headline
309. 13:01or in the first few lines of text.
310. 13:03Step three, what are the reasons behind this latest move?
311. 13:07This step is very important and is perhaps
312. 13:10where most retail traders go wrong
313. 13:11when trying to find trades.
314. 13:15The reason behind why the price is moving
315. 13:17is absolutely crucial to understand
316. 13:19and will really help you to figure out what to do next.
317. 13:23You will discover the reason behind the move
318. 13:25by reading the main article itself.
319. 13:27Step four, what are the analyst expectations from here?
320. 13:32This will be where you start to understand
321. 13:34how to interpret the news.
322. 13:36As a beginner the best path is to simply follow along
323. 13:39with what the expert analysts and traders are thinking.
324. 13:43Each article should contain a specific expectation
325. 13:46that you can use to base your own trading on.
326. 13:48For example, do they expect the moves to continue
327. 13:52or do they think it is merely a pullback
328. 13:54against the main fundamental trend?
329. 13:56This will tell you whether to buy or sell.
330. 13:59They will also very often give you
331. 14:01specific price targets for that specific currency pair.
332. 14:04These targets are only general guidelines
333. 14:06but can give you a nice idea about how much of a move
334. 14:09can be expected.
335. 14:11Even if you're a complete beginner to fundamentals,
336. 14:13you can start practicing this process by following
337. 14:16the four steps that we have outlined here.
338. 14:18After a few days you will start to see just how directly
339. 14:22the fundamentals move currency prices every day.
340. 14:25This is your key to becoming
341. 14:26a consistently profitable FX trader.