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Fundamental Analysis Part 1 – How To Read The Markets


Hello and, welcome to this latest edition of courses on demand brought to you by Forex Academy! In this course, we will be discussing fundamental analysis on decision-making. As always, there is, of course, inherent risk when, trading in the financial markets. So, just before we begin, please do take a moment to familiarise yourself with the following disclaimer.

In focusing our attention during this webinar to fundamental analysis what we aim to outline is the foundation of fundamental analysis, why is it different from technical analysis, and why is it such a prominent school of thought, in terms of financial trading. With that, we will be looking at quantitative versus qualitative data. We will be assessing true market reverse on those market drivers specifically the effect price over the long-term that leads us nicely on to assessing economic data as, well as, those large non economic events that totally changed the macroeconomic account totally changed the macroeconomic environment that the market is experiencing and, that obviously leads us nicely into looking at market positioning how do the large financial institutions actually position themselves in the market looking for a long-term price profit first and, foremost let’s look at the foundation of fundamental analysis global asset prices move as, a direct result from what is happening in the larger economy depending on the asset class or market, the fundamental trader must acquire a unique level of knowledge specific to the market to be able to develop an edge a trading edge and, obviously then trade effectively the characteristics of fundamental trading can also be very different depending on the asset class forex trading requires a wealth of knowledge on macro economics commodity trading requires complex reasoning of the supply and, demand variables of that commodity and, equity traders must have the know-how to fundamentally analyse price earnings ratios growth projections and, company performance in relation to competition. So, really no matter the scenario knowledge is power in better understanding the overall economy, then we can achieve a better awareness of how asset prices will move with economic data. So, let’s actually consider a few of those economic and, data examples we have sustained economic growth how does that affect equity prices well of course we’ll see equity prices rise over the long-term and, as, the macroeconomy is performing well we will see more jobs come into the economy job creation will see more consumer spending and, we’ll see that result into strengthening the equity prices over the medium to long-term rising inflation perhaps, what effect would raise an inflation have on the gold market? Well, the hedge against inflation is one of the traditional motors behind gold investment and, really is to protect capital erosion against the rising cost of goods and, services. The investment community often floods the precious metal market in search for a store of value. So, if we just think about that for a moment, we know gold is a store of value. We know that rising inflation relates to long-term increases in and, the price of goods or services. So, if we want to protect capital from that price increase of currency our goods and, services, what we love to do is actually invest in something that can store that value and, hence gold. So, we’ll see prices rise in gold rising oil prices how might this effect perhaps the currency let’s look at this example the US Canadian dollar well when prices for a key export increase the domestic currency of economic exporters will also increase. Now, the Canadian dollar, otherwise known as, the Lunia is quite significant in terms of oil prices. The loonie was strengthened when oil prices rise as oil is a major export product for Canada. So, we will generally see and, strengthening oil prices and, a relative strengthening in the Canadian dollar or otherwise as, expressed in this small chart downside in the US dollar but that’s really representative strength in the Canadian dollar escalating conflict in the Middle East and, oil well this is much more of a simple one obviously we will see prices go up as, there are fears that the supply mechanism for oil from the Middle East may be compromised will see oil prices rise as, we move on discussing fundamental analysis of course analysis foundation we cannot and, forget legendary investor Warren Buffett who is a key investor in and, assets that coca-cola he owns his own investment firm brochure half the way I’m really his idea established through global investing communities and, and his knowledge is absolutely fantastic indeed the aim of the fundamental trader is to assess value. So, he’s a real value trader if, we properly assess value then surely we can develop our decision-making skills to identify promising trading opportunities and, that’s it that’s really the us the asset of a good fundamental trader to properly assess our value as, a result of the fundamental research.

So, a good quote from a legendary investor Warren Buffett is it’s far better to buy a wonderful company a fair price than a fair company a wonderful price that’s absolutely the case as we assess fundamental analysis on decision making we must look at quantitative versus qualitative data. Now, considering the distinction between the two types of data we typically define them by referring to data as quantitative if, it is numerical in form and, qualitative when, the data has a more theoretical basis. Now, why is that the case? Well, qualitative data is more concerned with understanding human behavior from the informant’s perspective and, they formed is simply ourselves as, economic agents and, traders. It assumes a dynamic and, negotiated reality. So, there’s a level of discretion to understanding our qualitative approach in contrast quantitative data is concerned with discovering facts about social fun it assumes a fixed and, measurable reality in other words the fixed immeasurable reality is the raw data the numbers that we try to derive social phenomena and, extract thought from that with the method death data are collected through participation observation in interviews data are analysed by themes from descriptions by informants again that’s simply us unreported in the language of the informant in contrast their quantitative data are collected through measuring things data are analysed through numerical comparisons and, statistical inferences and, data are reported through that statistical analysis. So, we use with quantitative data the raw data to formulate charts and, graphs to give us an overall picture statistically and, to look for social phenomena and, obviously help trading decisions fundamental trading is considered to be more a qualitative approach qualitative research is multi-method and, focus involving an interpretive naturalistic approach to matter this means a qualitative researchers study things in their natural settings attempting to make sense of or interpret phenomena in terms of the meanings people bring to them research following a qualitative approaches explore exploratory and, seeks to explain how and, why a particular market is behaving and, therefore fundamental traders often based their trade decisions on a question of value, what does that mean for our trade decisions? Well if, research shows that an asset is undervalued these traders will look for buying opportunities if, on the other hand research suggests and, us is overvalued these traders will look for selling opportunities technical trading on the other hand is considered to be more a quantitative approach quantitative research collects data in numerical form which is then subjected to statistical analysis the data is then measured to construct graphs and, charts to physically represent patterns or ideas that provide statistical reasoning as the research is used to test a theory it aims to ultimately support or reject the hypothesis. So, as, this approach tests raw data it can be applied to many different environments and, that’s a huge advantage to using this quantitative approach and, actually deriving reasoning from the raw data across a many different many different fields or industries data analysis helps us turn statistical data into useful information to help with decision making and, therefore a quantitative research is more focused on our objectivity and, that would certainly be the main reason why we would say quantitative approach or quantitative trading, it has more of an essence of technical training because as, technical traders we want to become very objective if, we look towards our technical indicators to take Bollinger Bands as, an example it uses a statistical model across a variation from the mean and, follows price action to look for objective trading decisions as, such. So, certainly the case technical trading is considered to be much more of a quantitative approach that’s like true market drivers and, assess how those market drivers really affect price over the long term market trends are shaped by larger economic factors. So, first and, foremost we can look at government influence higher kind of government influence and, the financial markets and, really drive prices over the long term by increasing or decreasing interest rates the government or the US Federal Reserve in the US there can slow or accelerate growth. So, this is called monetary policy. So, actually by using government Paul say they can manipulate the financial markets they can actually manipulate the price of assets and, actually our fundamental themes in including rates of unemployment and, consumer spending try and, slow or are if, the objective is to accelerate growth they can do that via monetary policy the government can attempt to ease unemployment and, stabilise prices by increasing our contracting spending is called fiscal policy. So, very real and, events social events are social constructs within an economy can be changed I’m manipulated by government influence and, that can lead to long term price drives and, particularly in the equity indices on in something like a domestic currency cup and, flow. Now, I would couple the flow have a huge impact on market price and, really drive prices over the long term the more money that leaves the country the weaker the country’s economy and, currency becomes stronger in countries that export more than they import, keep the economies generally quite strong and, we can see the level of capital flow between nations we have certain agreements. Now, after to be one there it’s seen a little bit of – on discussion in the news at the moment certainly these trade agreements and, levels of capital flow as, they moved from contrary through contrary affect exports and, imports and, have an overall economic effect on the domestic economies speculation on expectation the direction consumers investors and, politicians believe the economy is headed impacts how we act today another’s most certainly the case the sentiment indicators gauge, what certain groups think the economy is doing. So, this is one example where we can see actual speculation and, expectation almost become a self-fulfilling prophecy whether it’s the phenomenal institution or investor or a top-level politician not and, that believes that prices aren’t stabilising and, there needs to be some real government change that can actually cause and, a self-fulfilling prophecy when, the government comes together to actually interact change and, actually and, confirm policy change towards long term price movement under our level of consumers their supply and, demand and, obviously the key function of supply and, demand will and, totally dominate many assets particularly the commodity markets supply and, demand for products currencies and, other investments items in demand with shrinking suppliers will see their prices rise if, supply outpace its demand prices will fall and, it’s all was you know a balancing act between supply and, demand to actually interact with the market forces to drive the market and, to formulate ,what the market sees as, fair value at that given time as, mentioned there particularly in asset classes such as, commodities the oil market soft commodities like wheat sugar they are all very much supply and, demand driven in terms of their price and, that’s certainly a true market driver over the short medium and, long term for those asset classes economic data economic data is important as, it reveals a true picture of an economy’s condition it allows traders to understand how economy stands in respect to others and, can help us determine whether monetary and, fiscal policy and, other financial programs have been successful.

So, why is it so important in terms of decision-making and, fundamental analysis to understand economic data? Well because we need to understand the overall macroeconomic picture of a domestic economy and, how those economic data releases are actually subjected to and, discretion or are subjected to a level of interpretation by market participants in keeping with that we look at the business cycle economic data is particularly important to us as, can indicate how the economy is performing at those various stages of the business cycle. So, most certainly, what would be more significant is a huge jump in risk in and, the rate of unemployment, for example, a huge and, decrease sorry in the rate of unemployment would be more suitable weakened in times of recession as, opposed to a time of boom where unemployment is very high. So, that will certainly drive the market in very different scenarios and, where you will see economic data surface in the market and, upon that announcement prices will move and, according to how the market interprets the data at the given time throughout the business cycle. Now, when, trading on economic data we must ensure that we know exactly ,what we are doing in order to trade on this economic data we must understand how the release data will fundamentally affect the market in question the data very much depends on the market we are interested in trading and, that’s very important to notice I’ll give you a very simple example if we are looking to trade the crude oil inventories we will certainly be looking to trade the oil market as opposed to a Forex pair based on a huge increase or decrease in supply in those crude oil inventories. So, it is indicative of which asset class or market that we are choosing to trade economic data often has a very different effect in the short term, not in the long term. So, do be aware of that when, trading the financial markets guys often ,what you can see is a short term burst to one side the market can react quite irrationally we often see a quick burst perhaps to the downside in price movement and, as, market participants come together to formulate unreason behind fundamentally why the market is and, is pricing in the news that way we can see a price is reversed in the more medium to long term and, actually, in this case, I create new highs that and, form a bullish trend. So, mortgage can react irrationally to economic data and, often miss judge or miss price market fundamentals often take time to affect price change and, create trends let’s have a look at non economic events they are they can be quite significant in terms of fundamental trading under effect on the markets fundamental trading lends itself to also interpreting how non economic events can affect price analysis most often be carried out individually for each particular asset, what non-economic events affect price and, decision making well perhaps internal developments within a company. So, if, we look at a stock or our perhaps stock market equity like Google very famous indeed perhaps there’s a very concerning internal development and, considering profit projections and, that have not been released to the market but when, the market gets wind of of this projection these developments cause very sure uncertain price movement for the particular market in question we look at world events again a non-economic event but certainly global world events such as, war civil rest and, natural disaster often we see in the United States and, a hurricane season can have a devastating effect on some of those financial assets as, well and, hype, of course, is one not to be a misgiving hype is very important in terms of sentimental analysis and, if, we look across ,what has happened there him over the last six months certainly considering Bitcoin and, the frantic price rise of Bitcoin we can see that hype has very much a big factor a big role to play in price movement in the cryptocurrency let’s look at the case study here for a non economic event we have a non if, you’re familiar with this case it’s an absolutely fascinating story Enron 2001 a company was an energy corporation in America and, the commodities company once self-proclaiming to be the largest energy company in the world and, Ron eventually filed her back home to see bankruptcy following a sustained institutionalized accounting fraud that inflated share prices for several years absolutely scandalous the aftermath of the Enron scandal destroyed confidence in corporate America and, led to a huge retreat of capital from US equities particularly it may be mentioned in the energy sector. So, obviously as, an energy company this destructive news can filter its way in through the sectors and, obviously cause very negative long-term price action indeed although, the scandal was a huge shock to the market fundamental traders knew this non-economic event would have hugely negative effects for months to come we have a quote here from a Robert Miller who is heavily involved in the case the collapse of Enron was devastating to tens of thousands of people and, shook the public’s confidence in corporate America can you think obviously why a case like this could really have such an effect on equity investment in America particularly in perhaps an energy sector or utility sector investments such a huge scandal obviously it’s you know trading equities has as, much to do with confidence and, in ownership of shares as, well as, price performance. So, it had a devastating effect and, just goes to show higher non-economic singular raised at natural event like this within and, within one particular company can have such a negative effect in the marketplace that leads us all nicely to market positioning ,what a positioning is all about the big players the big traders in the marketplace that are looking for these big trades they don’t necessarily involve themselves with short-term scalping or our very short positions in the marketplace like many traders do, what they look to do is particularly hedge funds develop a very consistent very well-thought-out fundamental trade decisions based on a lot of cute fundamental analysis on decision making for many large market participants such as, finance institutions and, hedge funds the very essence of the training will target long term price changes as, a result of changing macroeconomic variables their decisions are thus a result a very carefully conducted fundamental analysis.

So, this can help us as, well if, we know a large institutional is positioning itself within the market place if, we have a feeling or a sense or perhaps news that would dictate with which direction they’re looking to trade that will certainly aid us in our decision as, well in the peeler to large news source institutions will build large long or short positions in the marketplace the objective is either for protection from risk or from profit obviously profit being a main objective for long term fundamental price change why would they look to perhaps protect themselves from risk? Well if they perhaps know that there’s going to be a large appreciation or depreciation in the currency they may have a lot of other assets denominated in that currency and, the objective, therefore, could be to position in the market to actually look to hedge that risk within the currency markets themselves. So, with many different objectives there they look to take these huge positions in the market it is often these large market participants that cause large swings and, volatility when, realities do not meet the market expectations and, that’s absolutely the case ,what we’ll do is actually look at a few examples here to explain ,what we mean when, we see market positioning go wrong here we have the breaks a note and, this is the cable or pound US dollar market obviously very significant in terms of a world non-economic event but it was a huge piece of news a huge shock to the market at the time and, obviously we can see how the currency itself reacted ,what we see is fear within this price charting moving down we see a little bit of a price channel form with a support level of resistance however, that fear leading up to fear and, uncertainty leading up to the week’s just before these are daily comment sticks the week before and, the actual decision shows that there is some fear and, uncertainty and, some money coming out of sterling in relation to the dollar ,what we then see is market positioning ,what I do remember when, we before we’ve seen a lot of fundamental analysts coming out with her and, forecasts to say it was more or less a ton and, oyster dealer there was no way and, the UK would be leaving the European Union and, we see this reflected in the market price market positioning then hits the bottom with many green Commerce in a rope suggesting that this has been priced in these large market participants are really pricing in and, a stayer vote that the UK will most certainly stay within the European Union and, that’s reflected as, the price trades up within this week leading up to the decision itself then ,what we see is the bracelet leave vote a massive shock to the market we see some serious volatility to the upside and, downside and, then the currency actually trades down the whole way from one around 147 to 133 within one day trading an absolutely huge percentage loss in the overall price of sterling a huge shock to the market we can see that it’s technically very significant given high market positions we’re actually giving up for a stayer vote they were all proved wrong well that’s inevitably if, we look closer at this price actually ,what we see within the price action the caramel slip structure here tells us a fascinating story of high market participants began to prematurely price in the expectation of a Bryce it’s their vote heavy long position accumulated in the pound US dollar almost a week before the fundamental decision was made. So, they’re trying to position they see a very strong probability that the UK will obviously vote to stay and, Sterling value will increase over the medium to long term certainly that does not happen they are proved wrong and, they suffer the consequences. So, a fantastic example to see how market positioning, particularly with expectation and, a vs. result, actually affects the market again market positioning we look at the U.S. presidential election this is the S 500 ,what we can see here is uncertainty leading up to the November and, presidential election decision in the week leading up to the presidential decision market participants prepare for uncertainty by unwinding long equity position. So, there’s just a level of uncertainty in the markets and, in terms of a risk on risk off approach and, ,what she’ll be discussing with many of the fundamental analysis webinars we can see money coming out of US equities and, really positions on winding ons the market rates turn to new lows there then when, we see within this little green area in the days preceding the election market participants begin to position for an expected Democratic win almost like the Braves did vote it was am being starting to be priced in that Hillary Clinton was am a head in the polls there was no way at all Trump would be elected by the US populace and, that the market really starts a position for the higher probability trades evidently ,what we see there in the market experience is large volatility we can see the candlestick there just and, I think it’s the ninth of November that date indeed we can see the Trump win causes severe volatility to the US equity market but ,what it does actually is eventually lead to a bullish trend how’s the market formulates where prices will go ,what that actually means Trump selection ,what it means for the overall economy obviously he has huge reforms and, has implemented his reforms in terms of tax ,what that means in terms of us speculation on equity prices and, we see a large trend start to path the way from that day indeed and, that concludes our study of fundamental analysis on decision making with our webinar outline there we should at this stage understand that the foundation of fundamental analysis why it is so, key in terms of fundamentally analysing the financial markets and, deriving a basis of price for value we should understand quantitative versus qualitative data and, the difference really that quantitative is more numerically focused and, qualitative is a human behavioural approach to assessing data we looked at true market reverse and, particularly assess things like government influence supply and, demand functions and, how they can affect price we looked at economic data and, non-economic events and, see how those news events really play out in the market in terms of beans objectively this cost three market participants on how those market participants react in accordance to their sentiment on those data forms then we looked at market positioning and, we can see how those large finance institutions really gear up for long the big term trades the macroeconomic trades and, when, they are wrong high price can be very volatile and, cause massive shocks to the markets indeed thank you very much for joining us on this latest instalment of courses on demand by Forrester Academy we do hope to see you very soon bye for now!


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