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| =='''[[Sentiment Analysis Overview from a Fundamental Perspective]]'''== | | =='''[[Sentiment Analysis Overview from a Fundamental Perspective]]'''== |
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| We have a large Wiki on [[Sentiment Analysis]] [[Sentiment_Analysis | HERE]]. Here we will do a short explanation of [[Sentiment Analysis]].
| | Fundamental Analysis and Sentiment Analysis are two of the most important subjects in Forex trading. In this Wiki, we will take a [[Sentiment Analysis Overview from a Fundamental Perspective]] and explore some ways to trade them including: |
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| The other most common driver of fundamental information is something called [[Sentiment_Analysis | sentiment]]. We have already mentioned [[Sentiment_Analysis | sentiment]] a few times now but up to this point we have not provided a definition of what [[Sentiment_Analysis | sentiment]] actually is. Let's try and break that down now.
| | * [[Sentiment_Analysis_Overview_from_a_Fundamental_Perspective#The_Best_Trades | Sentiment Analysis Overview from a Fundamental Perspective]] |
| | * [[Sentiment_Analysis_Overview_from_a_Fundamental_Perspective#The_Best_Trades | The Best Trades]] |
| | * [[Sentiment_Analysis_Overview_from_a_Fundamental_Perspective#Good_Trades | Good Trades]] |
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| Let’s first think of fundamentals as the big ''"Macro Picture"'' of the health of an economy. If the particular economy is performing well and interest rates are rising then we would expect the [[currency]] of that nation to move higher over the long run. People want to invest in growing and stable economies that are performing well so this means that they will need to buy the local [[currency]] of that economy in order to invest in it. This is the most basic picture we can come up with for what fundamentals are.
| | You can access the main Wiki for [[Sentiment Analysis Overview from a Fundamental Perspective]] [[Sentiment Analysis Overview from a Fundamental Perspective | HERE]]. |
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| Well, we know that [[currency]] [[Price_Action_Analysis | prices]] just don’t go up in a straight line. It would be nice but that’s not the reality, unfortunately. Even though the big picture fundamental outlook may be overall positive there will be many days where the [[Price_Action_Analysis | price]] actually goes down against the fundamental [[Trends | trend]]. In these times this means that the [[Sentiment_Analysis | sentiment]] of the day has turned negative and forced [[Price_Action_Analysis | price]] to be temporarily out of line with the big picture fundamentals.
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| [[Sentiment_Analysis | Sentiment]], in its most basic form, is the ''"Mood"'' of the market right now in the ''"Current"'' [[Forex_Trading_Sessions | trading session]]. It’s similar to fundamentals except it lasts for much shorter periods of time. [[Sentiment_Analysis | Sentiment]] can be in line with the fundamentals but it can also move [[Price_Action_Analysis | price]] in the opposite direction of the fundamentals. The interesting thing about [[Sentiment_Analysis | sentiment]] is that it can last anywhere from a few seconds to many weeks depending on how strong that [[Sentiment_Analysis | sentiment]] is.
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| The importance of this aspect of [[Supply_and_Demand | supply and demand]] cannot be underestimated. [[Sentiment_Analysis | Sentiment]] is so important that you will spend most of your time trying to identify the [[Sentiment_Analysis | current sentiment]] for your [[trading]] opportunities. This is especially true if you are a shorter-term trader such as a [[Trader_Types#Day_Traders | day trader]]. If you are a [[Trader_Types#Day_Traders | day trader]] you will need to be in tune with how the market is feeling all day while you are [[trading]].
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| [[Trader_Types#Day_Traders | Day traders]] will always want to keep the big picture fundamentals in the back of their minds, but for their biggest concern is what the market is thinking right now so that they can jump in and hopefully make some pips in the [[Forex_Trading_Sessions | current trading session]].
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| The very best [[Fundamental_and_Sentiment_Trading_Strategies | trades]] happen are when the [[Sentiment_Analysis | current sentiment]] is in line with the big picture fundamentals. These are the easiest [[Fundamental_and_Sentiment_Trading_Strategies | trades]] because you have the power of the longer-term investors using the fundamentals and the shorter-term hedge fund traders using the [[Sentiment_Analysis | sentiment]] all pushing the [[Price_Action_Analysis | price]] together in the same direction. This is when you can make a lot of pips very quickly with [[Fundamental_and_Sentiment_Trading_Strategies | trades]] that never try to go against you. This is one of the most important concepts traders should learn.
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| The very best [[Fundamental_and_Sentiment_Trading_Strategies | trades]] look like the following:
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| * If fundamentals + and [[Sentiment_Analysis | sentiment]] + then buy all day long at good buy points.
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| * If fundamentals – and [[Sentiment_Analysis | sentiment]] – then sell/go short all day long at good sell points.
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| These are the type of [[Fundamental_and_Sentiment_Trading_Strategies | trades]] that tend to last longer and move more in terms of pips or [[Price_Action_Analysis | price]]. These are the [[Fundamental_and_Sentiment_Trading_Strategies | trades]] that can make you a lot of money if you know how to identify the long-term fundamentals combined with the [[Sentiment_Analysis | sentiment]] of the day properly.
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| Good [[Fundamental_and_Sentiment_Trading_Strategies | trades]] look like the following:
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| If fundamentals are ''"Positive"'' and [[Sentiment_Analysis | sentiment]] is ''"Negative"'' you have 2 options:
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| # Allow the negative [[Sentiment_Analysis | sentiment]] to bring the [[Price_Action_Analysis | price]] back to where it makes fundamental sense to start buying again.
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| # [[Fundamental_and_Sentiment_Trading_Strategies | Trade]] the negative [[Sentiment_Analysis | sentiment]] short against the positive fundamentals. This is where knowing how strong [[Sentiment_Analysis | sentiment]] is will help you make some profitable [[Fundamental_and_Sentiment_Trading_Strategies | trades]] against the big-picture fundamentals.
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| If fundamentals are ''"Negative"'' and [[Sentiment_Analysis | sentiment]] is ''"Positive"'' you have 2 options:
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| # Allow the positive [[Sentiment_Analysis | sentiment]] to bring the [[Price_Action_Analysis | price]] back to where it makes fundamental sense to start selling again.
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| # [[Fundamental_and_Sentiment_Trading_Strategies | Trade]] the positive [[Sentiment_Analysis | sentiment]] long against the positive fundamentals. This is where knowing how strong [[Sentiment_Analysis | sentiment]] is will help you make some profitable [[Fundamental_and_Sentiment_Trading_Strategies | trades]] against the big-picture fundamentals.
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| At its most extreme, virtually nothing will stop a market until its participants have been fully satisfied. The markets are simply too large for one entity, authority, or even group of authorities to move [[Price_Action_Analysis | prices]] in a direction that the markets don’t appear to want. Five billion [[US_dollar | dollars]] of transactions would represent a serious intervention by major a [[Central bank]] but would only represent less than 1% of the daily [[Forex | FX]] volume in the [[Forex_Trading_Sessions#The_London_Session | London trading session]] alone. But, when all of the big players agree that [[Price_Action_Analysis | price]] should be moving in a particular direction this can lead to some fantastic [[trading]] opportunities with major upside potential for your [[The_Best_and_Most_Popular_Forex_Platforms_for_Demo | trading account]].
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| In later Wikis, we will expand on the concept of [[Sentiment_Analysis | sentiment]] and give you the [[Trading_Tools | tools]] and [[Fundamental_and_Sentiment_Trading_Strategies | strategies]] you need to [[Fundamental_and_Sentiment_Trading_Strategies | trade]] with [[Sentiment_Analysis | sentiment]] effectively. But for now, we just want you to understand that fundamentals that you determine by [[Fundamental Analysis]] are the big macro picture of what is going on in an economy and [[Sentiment_Analysis | sentiment]] that you determine by [[Sentiment Analysis]] is the mood or the market right now in the [[Forex_Trading_Sessions | current trading session]]. [[Sentiment_Analysis | Sentiment]] is caused by fundamental economic data. [[Economic data releases]] and market-moving information that could come in many forms which we will discuss in other Wikis.
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| =='''[[Fundamentals and Sentiment]]'''== | | =='''[[Fundamentals and Sentiment]]'''== |
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| You may recall that the fundamentals, particularly for [[Forex | FX]] [[trading]], tend to revolve around the [[Central banks]] of each nation and the expectations of the market for what that bank will do next with its interest rate policies. The [[Central banks]] use [[Economic_data_releases#Specific_Economic_Indicators | economic indicators]] to determine the state of the economy and then implement the various [[Trading_Tools | tools]] they have at their disposal. They do this with the hopes of improving the indicators they deem important to keep the economy stable and in line with their policy mandates.
| | In the following Wiki, we will explore what both fundamentals and sentiment are and build and expand on previous information from our [[Fundamental Analysis]] Wiki. |
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| To explain this effectively we have to break the concepts of this analysis down into two distinct parts:
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| # '''Fundamentals:''' The first part is the underlying fundamentals that we talked quite a lot about in previous sections. Fundamentals are the big macro picture for the economy being measured. For example, if you are [[trading]] the Australian Dollar then you need to understand the economic situation of Australia and what the [[Central_banks#Australia_%E2%80%93_The_Reserve_Bank_of_Australia_(RBA) | central bank of Australia]] is concerned with.
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| # '''Sentiment:''' What we haven’t looked at too much are the things that are driving the [[Price_Action_Analysis | price]] right this moment in the here and now. This is called [[Sentiment_Analysis | sentiment]] and is the most important thing you need to concern yourself with if you are [[Speculating | considering]] becoming or are a [[Trader_Types#Day_Traders | day trader]].
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| Therefore, we have two core elements that we must be in tune with at all times; the underlying fundamentals and the ever-changing [[Sentiment_Analysis | sentiment]]. This is an extremely important distinction to make so make sure that you have your thinking cap on as you go through this section.
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| The simplest way to understand the difference between fundamentals and [[Sentiment_Analysis | sentiment]] is to imagine that the fundamentals are the big picture. This big picture is things that don’t change very often and are the things that are driving [[Price_Action_Analysis | prices]] over weeks and months. [[Sentiment_Analysis | Sentiment]], on the other hand, are the short-term things that the market participants are obsessing over that are driving [[Price_Action_Analysis | prices]] over [[Forex_Market_Hours | hours]] and days in the [[Forex_Trading_Sessions | current session]] and beyond.
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| Of course, [[Sentiment_Analysis | sentiment]] can take over in the short term and move the [[Price_Action_Analysis | price]] against the big picture fundamental [[Trends | trend]]. However, as long as the core principles remain in play the [[Trends | trend]] will typically resume at some point when the [[Sentiment_Analysis | sentiment]] wares off and fades away from the market's memory.
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| The market tends to have a short-term memory when it comes to [[Sentiment_Analysis | sentiment]]. This means that the [[Sentiment_Analysis | sentiment]] must be very strong to drive [[Price_Action_Analysis | prices]] for more than a couple of days. It's pretty common for the market to get really concerned with a [[Economic_data_releases | specific news item]] and move [[Price_Action_Analysis | prices]] hard in one [[Forex_Trading_Sessions | trading session]] only to completely reverse that move the next [[Forex_Trading_Sessions | session]] because there is some new piece of information that the market is focussing on instead.
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| Understanding that the [[Sentiment_Analysis | sentiment]] can be with or against the big picture fundamentals is key. But the best [[Fundamental_and_Sentiment_Trading_Strategies | trades]] will always be when the [[Sentiment_Analysis | current sentiment]] is in line with the big picture fundamentals. This is because this situation will cause the most number of market participants to [[Fundamental_and_Sentiment_Trading_Strategies | trade]] in the same direction at the same time. However, it's also key to understand that you can make a lot of pips when the [[Sentiment_Analysis | sentiment]] is opposite the fundamentals because the market tends to forget about the fundamentals when there is a reason to think differently.
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| Understanding these two concepts and how they work provides us with the foundations for identifying various [[trading]] opportunities throughout the [[trading]] day. For example, some traders use the short-term [[Sentiment_Analysis | sentiment]] as an opportunity to [[Fundamental_and_Sentiment_Trading_Strategies | trade]] the longer-term [[Trends | trend]] at a much more attractive [[Price_Action_Analysis | price]]. This means that these traders wait for a situation when the [[Sentiment_Analysis | sentiment]] is actually opposite to that of the fundamental [[Trends | trend]]. This causes [[Price_Action_Analysis | prices]] to correct in the short term setting up nice opportunities to get in the fundamental [[Trends | trend]] at a better [[Price_Action_Analysis | price]]. At the same time, other traders may take advantage of the counter-trend [[Sentiment_Analysis | sentiment]] and [[Fundamental_and_Sentiment_Trading_Strategies | trade]] in line with it to make a quick profit.
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| As we have already seen, fundamentals are very important to successful [[trading]] but there are other core areas that must be developed if a trader is to become successful for the long run; [[Fundamental Analysis]], [[Sentiment Analysis]], [[Technical Analysis]], [[Risk Management]], and [[Trading psychology]]. The goal should be to get yourself to a point where you are proficient in all these areas so that you can achieve your goals.
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| One of the core things that most traders will likely need to improve is something called ''"Conviction"''. Conviction simply means having confidence in your [[trading]]. Traders use conviction to determine how good a possible [[Fundamental_and_Sentiment_Trading_Strategies | trade]] is and how likely it is for that [[Fundamental_and_Sentiment_Trading_Strategies | trade]] to yield a profit. With time and practice your conviction levels will naturally increase making your [[trading]] comfortable and seem like second nature.
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| If you have a high level of conviction in a [[Fundamental_and_Sentiment_Trading_Strategies | trade]] based on all the things that you understand to be true then generally your chance of success is much higher. If you combine this with your own personal research for a specific opportunity then you have a chance at increasing your conviction level.
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| Traders that do not pay attention to their conviction levels, or simply don’t know how to increase their conviction levels, have very little chance of success. You must constantly be aware of your conviction, measure it, and control it in order to achieve a high level of success. Keep this in mind while researching a [[Fundamental_and_Sentiment_Trading_Strategies | trade]] to determine both the underlying fundamentals and the short-term [[Sentiment_Analysis | sentiment]] because your conviction level will directly influence your level of [[Trading psychology]] while you are in a [[Fundamental_and_Sentiment_Trading_Strategies | position]]. The more factual reasons you can find to support a [[Fundamental_and_Sentiment_Trading_Strategies | position]], the more comfortable you will feel overall because you will know that you have done all you could to give yourself the best chance of success.
| | You can access the main Wiki for [[Fundamentals and Sentiment]] [[Fundamentals and Sentiment | HERE]]. |
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| [[Central_banks | Central Banks]] are so important to the [[Forex]] market and all other financial markets that we have devoted an entire in-depth Wiki to all things [[Central_banks | Central Banks]]. In the following Wiki on [[Central banks | Central Banks]] we will explore: | | [[Central_banks | Central Banks]] are so important to the [[Forex]] market and all other financial markets that we have devoted an entire in-depth Wiki to all things [[Central_banks | Central Banks]]. In the following Wiki on [[Central banks | Central Banks]] we will explore: |
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| [[Central_banks#Introduction_to_Central_Banks | Introduction to Central Banks]] | | * [[Central_banks#Introduction_to_Central_Banks | Introduction to Central Banks]] |
| [[Central_banks#A_Brief_History_of_Central_Banks | A Brief History of Central Banks]] | | * [[Central_banks#A_Brief_History_of_Central_Banks | A Brief History of Central Banks]] |
| [[Central_banks#Central_Banks_and_Interest_Rates | Central Banks and Interest Rates]] | | * [[Central_banks#Central_Banks_and_Interest_Rates | Central Banks and Interest Rates]] |
| [[Central_banks#Overview_of_what_Central_Banks_do | Overview of what Central Banks do]] | | * [[Central_banks#Overview_of_what_Central_Banks_do | Overview of what Central Banks do]] |
| [[Central_banks#Monetary_Policy_and_Money_Supply | Monetary Policy and Money Supply]] | | * [[Central_banks#Monetary_Policy_and_Money_Supply | Monetary Policy and Money Supply]] |
| [[Central_banks#Central_Bank_Monetary_Policy_Tools | Central Bank Monetary Policy Tools]] | | * [[Central_banks#Central_Bank_Monetary_Policy_Tools | Central Bank Monetary Policy Tools]] |
| [[Central_banks#Hawks_and_Doves | Hawks and Doves]] | | * [[Central_banks#Hawks_and_Doves | Hawks and Doves]] |
| [[Central_banks#Major_Central_Banks | Major Central Banks]] | | * [[Central_banks#Major_Central_Banks | Major Central Banks]] |
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| [[Economic Cycles]] are such an important and vast subject that we have a separate Wiki dedicated to all things on [[Economic Cycles]]. In the following Wiki on [[Economic Cycles]] we will explore: | | [[Economic Cycles]] are such an important and vast subject that we have a separate Wiki dedicated to all things on [[Economic Cycles]]. In the following Wiki on [[Economic Cycles]] we will explore: |
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| [[Economic_Cycles#State_of_the_Economy | State of the Economy]] | | * [[Economic_Cycles#State_of_the_Economy | State of the Economy]] |
| [[Economic_Cycles#Inflation,_Deflation_and_Hyperinflation | Inflation, Deflation and Hyperinflation]] | | * [[Economic_Cycles#Inflation,_Deflation_and_Hyperinflation | Inflation, Deflation and Hyperinflation]] |
| [[Economic_Cycles#Economic_Cycles_and_the_4_Phases | Economic Cycles and the 4 Phases]] | | * [[Economic_Cycles#Economic_Cycles_and_the_4_Phases | Economic Cycles and the 4 Phases]] |
| [[Economic_Cycles#Economic_Data_and_Economic_Cycles | Economic Data and Economic Cycles]] | | * [[Economic_Cycles#Economic_Data_and_Economic_Cycles | Economic Data and Economic Cycles]] |
| [[Economic_Cycles#Indicators_within_the_Economic_Cycle | Indicators within the Economic Cycle]] | | * [[Economic_Cycles#Indicators_within_the_Economic_Cycle | Indicators within the Economic Cycle]] |
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Fundamental Analysis is simply the process of identifying and understanding the "factual reasons" why the market is moving in the direction that it is currently moving within the overall trend. This is in contrast to simply identifying that a trend or price move has already happened. Identifying that a market has already had a price move is the job of Technical Analysis which is all backward-looking. Understanding why a particular currency or market is moving is the job of fundamental analysis which is forward-looking and allows you to use this information to try and predict where prices might go in the near future.
Fundamental Analysis is an extremely underserved subject when it comes to retail traders and how they obtain their trading knowledge. In this Wiki, we will explore all the various aspects of fundamental analysis and how you can apply that to your own trading for improved performance.
This Wiki is a part of our Essential Forex Trading Guide. Be sure to check that out HERE.
Introduction to Fundamental Analysis
Fundamental Analysis goes far beyond a simple Technical Analysis approach which is what the typical retail trader will use to make their trading decisions. Understanding Fundamental Analysis will give you more conviction because you can have confidence that you are trading the real reasons why the market is moving rather than simply guessing by using some variation of chart pattern or indicator to make your trading decisions. In this Wiki, we will explore The Basics of Fundamental Analysis including:
You can access the main Wiki for The Basics of Fundamental Analysis HERE.
There are many Traders that are opposed to the concept of Fundamental Analysis. There are various reasons for this but what we will do in this Wiki is point out a few of the most popular objections and then provide some context on why they may not be well-founded objections including:
You can access the main Wiki for Objections to Fundamental Analysis HERE.
There is a big difference in the way that a retail trader approaches the Forex or any other financial market from how a professional institutional trader will go about navigating them. In the following Wiki, we will explore concepts such as:
You can access the main Wiki for Institutional and Retail Traders HERE.
When discussing fundamental analysis there are some core principles that we need to be aware of. Supply and demand are at the heart of fundamental moves in all markets including Forex. In the following Wiki we will explore:
You can access the main Wiki for Fundamental Supply and Demand HERE.
Fundamental Analysis and Sentiment Analysis are two of the most important subjects in Forex trading. In this Wiki, we will take a Sentiment Analysis Overview from a Fundamental Perspective and explore some ways to trade them including:
You can access the main Wiki for Sentiment Analysis Overview from a Fundamental Perspective HERE.
Exchange rates are an important aspect of understanding the full spectrum of fundamental analysis which is why we created a separate Wiki devoted entirely to Exchange rates. In the following Wiki, we will explore:
The main page for Exchange rates is found here: Exchange rates
Money Supply
We have a separate Wiki on Money Supply so please click on the links to take you to those specific Wikis to obtain this information.
The main page for Money Supply is found here: Money Supply.
To get a good grip on financial trading we need to take a few minutes out to look at something called "Intermarket Analysis" and how various asset classes and markets relate to each other. In the following Wiki on Intermaket Analysis we will cover subjects such as:
The main Wiki on Intermaket Analysis can be found HERE.
Advanced Fundamental Analysis
In the following Wiki, we will explore what both fundamentals and sentiment are and build and expand on previous information from our Fundamental Analysis Wiki.
You can access the main Wiki for Fundamentals and Sentiment HERE.
Central Banks
Central Banks are so important to the Forex market and all other financial markets that we have devoted an entire in-depth Wiki to all things Central Banks. In the following Wiki on Central Banks we will explore:
The main Wiki page for Central Banks is found here: Central Banks
Just like Central Banks, Economic Data Releases are so important to all financial markets that we have created a separate Wiki for them. In the following Wiki we will explore:
The main Wiki page for Economic Data Releases is found here: Economic Data Releases
The Forex market relates to other financial markets in various ways. In this Wiki, we will explore how different markets relate to and affect the Forex market including:
You can access the main Wiki for How the Forex Market Relates to other Markets HERE.
Economic Cycles are such an important and vast subject that we have a separate Wiki dedicated to all things on Economic Cycles. In the following Wiki on Economic Cycles we will explore:
Please refer to the Wiki for further information on Economic Cycles.
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