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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 [https://volatility.red/Price_Action_Analysis price move] has already happened.  Identifying that a market has already had a [https://volatility.red/Price_Action_Analysis 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 [https://volatility.red/Price_Action_Analysis prices] might go in the near future.
Fundamental Analysis is simply the [[Developing_your_Trading_Process | 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_Action_Analysis | price move]] has already happened.  Identifying that a market has already had a [[Price_Action_Analysis | 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 [[Price_Action_Analysis | 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.  
Fundamental Analysis is an extremely underserved subject when it comes to retail traders and how they obtain their [[trading]] [[Trading_Routine#Knowledge_Phase | 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.  


__TOC__


This Wiki is a part of our [[Essential Forex Trading Guide]]. Be sure to check that out [[Essential_Forex_Trading_Guide | HERE]].


='''Introduction to Fundamental Analysis'''=


__TOC__


=='''Introduction'''==


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. 
='''Introduction to Fundamental Analysis'''=
 
When we understand the exact reason why something is happening we suddenly have much more confidence in our [[trading].  If we can interpret what the market is ''thinking'' then we have the potential to predict which way the market will move next.  In other words, if we know what the market is thinking and what it might do next then we can make precise [[trading]] decisions in line with the market's intentions.  Doing this will do wonders to help you with your objective of making a profit from your [[trading]].  We simply trade in line with why the market is doing what it is doing. 
 
For example, if there are very good reasons for the market to be scared and go into risk-off mode then [https://volatility.red/Price_Action_Analysis prices] will likely fall in risk-on assets.  Knowing this, traders can take action to profit from this information.  Conversely, if there is a reason for the market to be confident and chase after profits then the market will likely rally in risk-on assets.  Having this information offers a huge potential to improve your [[trading]] performance and certainly puts you well ahead of the typical retail trader. 
 
We will learn much more about how we can profit from knowing the fundamentals later but for now, it’s important that you understand and have a healthy respect for fundamentals and just how much more powerful they can be to your overall performance. 
 
If we look at the chart below, we can see the EURUSD moved in a volatile upward direction after European Central Bank head Mario Draghi’s comments vowing to do whatever it takes to preserve the single [[currency]].  However, the institutional players in the markets started to see deflationary pressure in the EUROZONE and realized this would force the European Central Bank to take action to maintain its [https://volatility.red/Price_Action_Analysis price] stability and policy mandates. This coupled with an improving US economy indicated to professional traders that the interest rate differentials, or relative yield curves on US and ECB debt, would widen and thus put downward pressure on the Euro relative to the [https://volatility.red/US_dollar US Dollar].  You can see that the EURUSD fell quite steeply and there were a lot of profitable [[trading]] opportunities for months for anyone who knew how to take advantage of this information. 
 
https://i.imgur.com/f0mnkDL.jpg
 
Don’t worry if you don’t quite understand all this jargon just yet.  In the upcoming sections, you will gain a clear understanding of all of this and much more.  This is just one example to start our understanding.
 
 
===Fundamental Analysis and Real Life Scenarios===
 
Fundamental Analysis absolutely does not require a doctorate in economics, a university degree, or anything other than basic human intelligence and a desire to learn a new subject.  And just so that you know we are not lying to you we will use some real-world examples to demonstrate why fundamentals are not something to shy away from. 
 
So you’re a smart person and you have done some really cool things in your life, right?  You have probably accumulated a ton of knowledge on a variety of different subjects over the years, right?  We are willing to bet that you have actually gotten pretty good at certain things that you once had no idea how to do before, right? 
 
Ok, so let’s say that you are a carpenter by trade.  The first day that you started learning about the subject of carpentry you were probably pretty clumsy with the tools and unsure if you were doing things properly.  However, over time and lots of practice with your tools and measurements, you increased your skills in carpentry and eventually, your high level of skills demanded a much higher hourly wage than when you first started out.
 
Or let’s say that you’re an accountant.  It probably took you a lot of time to study and learn everything you needed to know in order to become an accountant.  You probably obtained a college or university degree that took 3 or 4 years to get.  Once you had all the knowledge down then you had to go out and practice what you learned from your schooling in the real world.  It was tough at first but I bet you can now do things with no effort at all that you previously fumbled over and struggled to do. 
 
Or maybe you’re a bodybuilder.  When you first started out you might have been skinny but after many gruelling hours in the gym, you eventually packed on a bunch of muscle.  The first time you hit the bench press it was a struggle to pump 50 pounds but after time and practice, you can now easily lift 5 times that.  Do you see the common theme in these examples?
 
Whether you are using numbers and spreadsheets, your body to lift heavy weights, or the finesse you now have as a master carpenter, the process you went through to become great is exactly the same thing; ''you learn the basics, you put in a lot of time and practice, and then you became really good at what you do.''  It doesn’t matter what subject you are talking about, the process of learning and executing your knowledge of the fundamentals is the exact same as anything else you want to become great at in life. 
 
A basic understanding of fundamentals is all you need to get started and be pretty competent at the same time.  If you stick to it you will naturally learn more and more elements and refine your knowledge and understanding along the way.  That is how all learning works.  You start out by learning some basic knowledge and then go out and practice it until you become competent. 
 
Learning about the fundamentals is pretty much following the same process that you have been doing in all areas of your life for your entire life. The more time you spend with the market using your knowledge of the fundamentals the better off and more profitable you will become in your [[trading]]. 
 
 
===A Trader's Personal Story on Fundamentals===
 
It seems fitting at this point for me to interject a personal story about how one professional trader came to understand the power of fundamentals for the first time.  We will keep this trader nameless for the sake of not creating any bias but he was once a fairly well-known fundamental and [https://volatility.red/Sentiment_Analysis sentiment] day trader on the internet whereas now he prefers to be behind the scenes and do his own thing.
 
Here is his story in his own words:
 
Many moons ago I was working with a start-up Forex brokerage in my home city of Toronto.  We were a boutique firm that catered to high-net-worth clients.  I was the port of call for these wealthy traders.  I came to the firm as a former big-shot equities trader that these high-net-worth clients could talk to and have some comfort knowing that they weren’t talking to some dollar phone monkey.  Basically, I was a friendly, successful, and highly knowledgeable trader tasked to provide a high level of service that these very wealthy clients expected. 
 
I can remember having many long and detailed conversations with these traders and it always blew my mind how similar their [[trading]] strategies were.  100% of them were pure technical traders.  I was coming from being a statistical arbitrage and market inefficiency trader so technical analysis was something that I had never really used before because it just wouldn’t work with what I was doing at the equities [https://volatility.red/Trader_Scouting_and_Prop_Firms_Overview_and_Comparison prop firm]. 
 
Some of the systems I was told about were ridiculously complicated and others were as simple as a moving average cross-over system but the key takeaway here is that they were all pure technical analysis [[trading]] methodologies.  Many of these traders talked a lot about how it was their poor [[trading]] psychology was what was holding them back.  A small amount of these wealthy traders talked about having some risk management procedures as well.  But, I never once heard any of these people talk about fundamental or [https://volatility.red/Sentiment_Analysis sentiment] based strategies.  To be honest, I did not even know what the fundamentals were at that point because no one had ever talked to me about them. 
 
For the most part, all of these clients were wealthy and had been quite successful in business and in life outside of [[trading]].  But, all of them wanted to add more money to their bottom line through [[trading]] in the exciting world of [[Forex]]. 
 
We had [https://volatility.red/The_Best_and_Most_Popular_Forex_Platforms_for_Demo client accounts] with as much as 10 million [https://volatility.red/US_dollar dollars] in them.  However, the one thing that I can truthfully say is that 100% of our clients lost money.  Literally 100%, that’s not a joke; we did not have one single profitable client.  From time to time a client would go on a tare make a few bucks but they would quickly give it back.  This was a time when I saw the most insane destruction of money I had ever seen in my life.  I saw clients lose millions, sometimes in just a few days, it was absolutely incredible.  Some of these clients would lose more money in a week than I had made in my life up to that point. 
 
So there were three major things in common with this group of traders: 
 
# They were all wealthy successful people outside of [[trading]].
# They all used technical analysis exclusively for their [[trading]].
# They all lost money.
 
Don’t you find that fascinating?  I know I sure did.  I went from being a hot shot successful arbitrage and inefficiency trader to working with an upscale Forex broker where all its clients lost money using various technical analysis systems.  If I’m honest I really didn’t know much about technical analysis other than what I had read in a few books.  At that point, I had never once put technical analysis into practical application with real [https://volatility.red/US_dollar dollars] in the real markets because my style was all built around arbitrage and inefficiencies in the US equity markets.  I certainly had no knowledge of the fundamentals either. 
 
As a side note, after about 4 years of [[trading]] the US equities market as an arbitrage and inefficiency trader, the US markets started to get more and more efficient making it increasingly difficult for me to make as much money as I was used to making.  This is why I got involved with the start-up Forex brokerage.  It was time to start exploring this hot new Forex market that everyone was talking about and I figured why not do it on the institutional level….You know, get a paycheck and learn a ton.  This is a route I highly recommend for people who need a paycheck and want to learn how to trade Forex in their spare time. 
 
All right, back to my story.  After about six months of watching these traders lose incredible amounts of money, I was dead set on creating a [[trading]] methodology that would do the exact opposite of what our clients were doing.  I knew all these guys were doing was [[trading]] some technical system so it was obvious that I didn’t want to build a [[trading]] system around technical analysis too.  After all, these traders were incredibly successful outside of [[trading]] so it was reasonable of me to assume that they were not raging lunatics but rather that the systems they were using to trade was what were actually flawed instead. 
 
I didn’t know it right away when I set out on my journey to figure out a great [[Forex]] [[trading]] methodology that was the exact opposite of technical analysis is actually fundamental analysis.  If technical analysis is black then fundamental analysis is white.  In [[trading]] terms, they are the opposite of each other.  It took me many months of struggle but I did finally figure out how to apply fundamental analysis in a way that I could day trade the Forex market.
 
 
=='''Objections to Fundamental Analysis'''==
 
===Objection #1: Applying the Fundamentals is Unnecessary Because you Only Need to Look at the Charts===
 
The first objection people have to fundamentals is that you only need to look at the charts and that applying fundamentals is too complicated and an unnecessary process. 
 
This is not correct for several reasons.  In later sections, you will hear us refer to [[Technical Analysis]] as being like driving a car but only using the rearview mirror to navigate your journey.  It will work sometimes, such as on a really long and straight road, but overall you will have a lot of accidents and it would be ridiculous to try and drive a car like this. 
 
https://i.imgur.com/GHPzAOp.jpg
 
Looking at the above chart is confusing yet many traders think that they can use all kinds of indicators to predict future [https://volatility.red/Price_Action_Analysis price movements].  Indicators, such as the Stochastic, have nothing to do with why the [https://volatility.red/Price_Action_Analysis price] is moving; it merely tells you that the [https://volatility.red/Price_Action_Analysis price] has done something and shows you this information in a visual way.
 
Another logical point to consider is that professional institutional-level traders use tools such as the Bloomberg terminal and Reuters Ikon.  These are very famous information gathering terminals that you may have heard of before.  They are built specifically to get [https://volatility.red/Economic_data_releases news and information] to traders as fast as possible.  The cost of a Bloomberg terminal is about $2,000 USD per month and comes with a two year contract.  So in order to have access to a Bloomberg terminal you basically need to spend $50,000 right off the bat. 
 
Why would these fundamental tools be so expensive if big funds and professional traders made their money staring at [https://volatility.red/Price_Action_Analysis price] charts and indicators which can be found for free literally anywhere?  Really try and think about that for a minute.  Is it actually possible that the road to riches is floating around for free for everyone to take advantage of?  It simply doesn’t add up that fundamentals are unnecessary when so many professional traders and money management firms are paying such high [https://volatility.red/Price_Action_Analysis prices] to get this type of information as fast as possible. 
 
Obviously, fundamentals help them make smart [[trading]] decisions which is why they are willing to pay a lot of money for that information.  Have you ever heard of a large money management firm paying $2,000 per month for a technical indicator tool? Maybe there are some but we would be very surprised if any of them did.   
 
 
===Objection #2: Fundamentals are too Difficult Unless you have a High-Level University Degree===
 
The next objection that people have, particularly retail traders, is that fundamental [[trading]] is hard or too difficult to understand unless you have been trained at an institutional fund or have some genius-level degree.  If you go through all our information on fundamentals you will see that fundamentals are actually simpler than technicals if you know what to focus on and what to look for. 
 
It is true that Fundamental Analysis can get complicated if you let it but we will not be looking deep into corporate earnings and debt sheets to find the information we need to make a good [[trading]] decision.  Rather, we have tools that do the heavy lifting for us so that we only need to focus on what is important to the market right now at this moment.  We then simply look to trade in line with what the market thinks is important.  Why would we ever want to trade contrary to what the market is telling us is important?  The market is king and we need to trade in line with the king, not against it. 
 
Researching the fundamentals can be broken down into a simple step-by-step process that will literally only take you a few minutes each day.  It certainly takes much less time than staring at [https://volatility.red/Price_Action_Analysis price] charts all day waiting for some sort of signal for you to be able to place a trade. 
 
 
===Objection # 3: All News is Priced into the Markets===
 
Another related objection is that all past, present, and future [https://volatility.red/Economic_data_releases news] is priced into the market at any given time.  This is related because understanding the [https://volatility.red/Economic_data_releases news] is a big part of how institutional traders trade using fundamentals. 
 
Many so-called experts teach a method called Efficient Market Hypothesis or EMH for short.  EMH states that all available information is priced into the market making any moves in the market totally random and therefore impossible to make consistent profits. 
 
In a short demonstration, we will show why this is complete nonsense and that anyone who perpetuates the myth of EMH has probably never tried to trade and certainly has never traded successfully.  EMH is an academic study that has no real application to the real markets.  So if you are unfortunate enough to come across one of these naysayers don’t get discouraged.  You can make your stake in the [[Forex]] or any other markets but you need to focus on the correct things which we will uncover in this and many other Wikis on this site. 
 
The example that we will use is the [https://volatility.red/Central_banks#Japan_%E2%80%93_The_Bank_of_Japan_(BOJ) Bank of Japan’s] (BOJ) quantitative easing (QE) program which was launched in April 2013 represented at point 1 on the chart below.  When this program was made public we found out that it essentially involved the unlimited printing of Japanese Yen in order to devalue the [[currency]] and encourage inflation, spending, and growth in the Japanese economy.  Of course, according to the basic laws of supply and demand, when there is an oversupply of something the [https://volatility.red/Price_Action_Analysis price] will fall and the same is true with [[currency]]. 
 
https://i.imgur.com/c4Ro6v0.jpg
 
 
The chart above is a weekly chart of the USDJPY currency pair.  Since JPY is the second part of the pair the USD is going up against the JPY.  Stated another way, the Yen is going down against the USD.  You will notice that the USDJPY was rallying long before the QE program was made official because the market was taking clues from the [https://volatility.red/Central_banks#Japan_%E2%80%93_The_Bank_of_Japan_(BOJ) Bank of Japan] for months before the announcement actually happened and attempted to [https://volatility.red/Price_Action_Analysis price] in QE. 
 
This is a great time to point out that '''when the market expects something to happen it will attempt to [https://volatility.red/Price_Action_Analysis price] it into the market in order to make some nice profits'''.  This is another way that we can follow along with the market and make some nice pips as well. 
 
In this scenario [https://volatility.red/Central_banks#Japan_%E2%80%93_The_Bank_of_Japan_(BOJ) BOJ] simply printed more money quicker than the natural rate of demand could absorb.  When the program was launched there was a very high expectation from some well-respected currency analysts that the value of the Japanese Yen would fall over the following months. 
 
The overall expectation was that the pressure of this QE program would eventually lead to the [[currency]] depreciating against the USD and rally the USDJPY pair up to 110.00.  If the USD goes up against the JPY then this means that the JPY is actually falling. 
 
This is a very well documented event but when the program was launched the [https://volatility.red/Price_Action_Analysis price] did not move up to 110.00 for over a year.  It took about 15 months for that piece of [https://volatility.red/Economic_data_releases news] to get fully priced into the market.  This allowed traders plenty of opportunity to get in and take advantage of this move without worrying about missing out the second the [https://volatility.red/Economic_data_releases news] was announced.  Under EMH this kind of event is impossible, which as we have proven, is obviously completely wrong.
 
At point 2 the USDJPY rallied on the back of [https://volatility.red/Speculating speculation] that the [https://volatility.red/Central_banks#Japan_%E2%80%93_The_Bank_of_Japan_(BOJ) BOJ] would have to add to their QE program if they were to meet their inflation target of 2%.  This is because inflation barely moved up from the first QE efforts and the market felt that the [https://volatility.red/Central_banks#Japan_%E2%80%93_The_Bank_of_Japan_(BOJ) BOJ] would need to step it up to get the job done.  This was the market attempting to [https://volatility.red/Price_Action_Analysis price] in the QE2 program. 
 
On October 31, 2014, the [https://volatility.red/Central_banks#Japan_%E2%80%93_The_Bank_of_Japan_(BOJ) Bank of Japan] announced the expansion of its Quantitative Easing program.  However, as you can see from the 1,000+ pip rally after the second QE program was announced that there was plenty of time to get in and make a nice profit from this second piece of [https://volatility.red/Economic_data_releases news]. 
 
This demonstrates that the market will always attempt to [https://volatility.red/Price_Action_Analysis price] in the [https://volatility.red/Economic_data_releases news].  However, it’s not able to fully [https://volatility.red/Price_Action_Analysis price] in or even understand the longer-term effects of this [https://volatility.red/Economic_data_releases news] on the [[currency]] valuation.  This is not a unique event in the [[Forex]] market. 
 
It is true that the USDJPY did rally for weeks in anticipation of the QE program being launched but by no means was the move even close to being priced into the market.  Nor were these expectations priced into the market instantaneously as EMH would have you believe.  When QE was launched the [https://volatility.red/Price_Action_Analysis price] was around 96.000 and eventually the rally gassed out around 126.000.  That’s about a 3,000 pip rally over 2.5 years that you could have been [[trading]] on the long side.  That’s right; you could have had an easy trade idea for 2.5 years if you just embraced learning and applying the fundamentals. 
 
There are countless more examples, even on short-term day trading time frames, of times when the [https://volatility.red/Economic_data_releases news] is not fully priced into the market.  This gives us a chance to see what is going on and get in to take advantage of some nice [https://volatility.red/Price_Action_Analysis price moves].  The truth lies somewhere in between the market attempting to [https://volatility.red/Price_Action_Analysis price] in the [https://volatility.red/Economic_data_releases news] and then reacting to the [https://volatility.red/Economic_data_releases news] itself. 
 
 
The previous objections tend to be the most common reservations that people have when approaching fundamentals.  There is really no reason to be concerned with these because what we are going to show you next will allow you to see for yourself how simple and how powerful the fundamentals really are.
 
 
=='''Institutional vs. Retail Traders'''==
 
Before we have a deeper look at fundamental analysis we feel it’s important to point out the major differences between institutional traders from retail traders.
 
Ok, so there is a pretty 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.  What we mean by a retail trader is a person who typically trades from their homes and is not employed in the financial markets.  An institutional trader would be someone who works at a hedge fund or an investment bank, think a corporate trader. 
 
In this section, we will talk about the two different types of traders, what their differences are, and why you might want to consider [[trading]] and approaching the market like one over the other.
 
 
===What is a Retail Trader?===
 
The chances are that if you are reading this then you are probably a retail trader.  Or maybe you are looking to become a trader and are you are doing a little bit of research before you dive in head first.  This is by design because we created these Wikis specifically for the retail market.  It would be a great compliment if institutional traders joined as well because there is definitely a ton of useful information found in these Wikis but our goal was always intended to help retail and home traders gain a glimpse into how the large funds and investment houses trade the [[Forex]] and other financial markets. 
 
Retail traders are typically normal everyday people who have jobs outside of the financial markets.  Sometimes they are small business owners but are looking for a way to make a little extra money in their spare time.  For many retail traders, it is their goal is to become a full-time trader to enjoy the freedom and flexibility that comes along with what they perceive to be a trader’s lifestyle. 
 
As far as the lifestyle goes you do need to be [[trading]] at certain times of the day to be a part of the best [[trading]] opportunities but you certainly can be anywhere in the world as long as you have a [https://volatility.red/The_Best_and_Most_Popular_Forex_Platforms_for_Demo trading platform], laptop, and a stable internet connection.
 
Retail traders usually get their [https://volatility.red/Forex#Paid_Education_/_Paid_Courses trading education]] by searching the internet for the latest and greatest system. Instagram has become a very popular place for ''"Gurus"'' to sell their lifestyle with flashy vacations and sports cars.  These systems are selling the dream of making millions for a small one-time fee or maybe even a monthly subscription.  Because retail traders mostly find their [https://volatility.red/Forex#Paid_Education_/_Paid_Courses trading education] online it’s almost inevitable that they start their career by utilizing some sort of technical analysis system that uses past [https://volatility.red/Price_Action_Analysis price behaviour], indicators, or patterns to attempt to predict future [https://volatility.red/Price_Action_Analysis price action].  This is because the internet is flush full of gimmicky trading systems that promise the world and are all based on [[Technical Analysis]]. 
 
If you do a quick Google search on [https://volatility.red/Forex#Paid_Education_/_Paid_Courses trading education] you will find all kinds of systems, gurus, algorithms, and indicators all promising that you will make boatloads of money with very little effort.  Even if you do a search for hard-copy books you will no doubt find almost all of them focus on some form of [[Technical Analysis]].  It all seems to be the same or similar thing packaged up with different catchy names to get you to buy.  The same goes for weekend seminars and webinars; they are almost all focussing on the same [[Technical Analysis]] stuff over and over with the only difference being how it’s being packaged and sold. 
 
The reality is that the people selling these systems have likely never made any money as a trader.  It’s very sad but it is probable that these gurus have only made money from selling you their trading-related products. 
 
This is not to say that [[Technical Analysis]] products are the only subject out there related to [[trading]].  There absolutely are lots of great websites and books that focus on some of the other stuff that you need to know such as [[Trading Psychology]] or [[Risk Management]].  However, this seems to be in the minority and can be difficult to find high-quality content.  It’s almost impossible to find any information about [[trading]] fundamentals and [https://volatility.red/Sentiment_Analysis sentiment] that is geared toward the retail market.  If you do find any fundamental information it’s likely that it is an academic study with no real practical application to day [[trading]] the financial markets.  It’s also very difficult to get all the information you need to know in order to become successful all in one place. 
 
The good [https://volatility.red/Economic_data_releases news] for you is that our Wikis will cover a vast array of the things you need to know in order to become a successful trader. 
 
We will let you in on a secret that the marketing guys don’t know or have been hiding from you.  We are pretty sure it’s because they don’t know.  [[Trading]] is a skill where you need to learn many moving parts.  It’s not enough to say that you are a pro when it comes to knowing everything about [[Technical Analysis]] because everyone knows [[Technical Analysis]] these days.  That’s great if you are a walking encyclopedia of [[Technical Analysis]] but you are only proficient in one of the 5 subjects you need to be in order to become truly successful as a financial trader. 
 
You need to become proficient with:
 
# [[Fundamental Analysis]].
# [[Sentiment Analysis]].
# [[Risk Management]].
# [[Trading psychology]].
# [[Price Action Analysis]]
# [[Technical Analysis]].
 
 
The first 4 are the most important and should make up at least 80% of your [[trading]] while [[Technical Analysis]] only being of value as a timing tool for entry and exits.  This is how the majority of institutional traders approach [[trading]]. 
 
What we find really interesting is that retail traders typically use roughly 95% technical analysis in their [[trading]] with a tiny bit of [[Risk management]] and probably little to no proper [[Trading Psychology]].  Certainly, almost no retail traders are using fundamentals and [https://volatility.red/Sentiment_Analysis sentiment analysis] which are the actual reasons that [https://volatility.red/Price_Action_Analysis prices] move in the [[Forex]] market and other financial markets.  We can say with the utmost conviction that [https://volatility.red/Price_Action_Analysis prices] do not move because of [[Technical Analysis]] or moving lines on a [https://volatility.red/Price_Action_Analysis price] chart.  And we think that most people will agree if they are using any form of logic. 
 
Do you think that maybe there is something to the statistic that 95% of retail traders fail and lose money overall?  That is an incredibly sad statistic and we would say from our experiences that it’s probably a very conservative percentage.  At the same time, these money-losing retail traders are using 95% technical analysis to guide their [[trading]] decision!  Really think about that for a moment and let it sink in.  95% of retail traders fail and lose money over the long run while at the same time 95% of retail traders use [[Technical Analysis]] exclusively to make their [[trading]] decision.  Isn’t that an amazing thought?  95% of retail traders lose money and the same 95% of retail traders use [[Technical Analysis]] systems to trade the market.  This is about the time that you should have a light bulb go off in your head.  If you didn’t just have an aha moment please read that paragraph again.  The failure statistics of retail traders directly match up with the percentage of retail traders that use [[Technical Analysis]].   
 
What it all boils down to is that the main focus of retail traders is typically some sort of system that is based on close to 100% [[Technical Analysis]].  It could be a manual [[trading]] strategy or it could be some kind of algorithmic strategy but it’s definitely technical in nature.
 
 
===What is an Institutional Trader?===
 
An institutional trader is pretty much the exact opposite of a retail trader.  An institutional trader is a trader that works for some kind of financial institution such as hedge funds, banks, investment banks, [https://volatility.red/Trader_Scouting_and_Prop_Firms_Overview_and_Comparison prop houses], pension funds, or any other type of money management firm.  Said another way, these are corporate traders, not at-home traders as in the case of retail traders. 
 
These traders will typically get an economics, math, MBA, or finance degree from a college or university before getting a job as a junior trader at a financial institution.  Over time, as they gain more experience, they will learn how the largest traders in the world manage huge sums of money on behalf of the bank or their clients.
 
The institutional trader will typically start their career as a junior analyst and work their way up over the years to become a senior fund manager with billions under management.  This process will typically take many years, if not decades, to be able to get to the point where the trader is competent enough to manage huge sums of money and pull an above-average return when compared to traditional asset classes such as stocks and bonds.
 
Their main focus is on the fundamental situation of economies.  Much of their attention will be paid to the [[Central banks]] of each major nation that they monitor and the economic statistics coming out of their respective countries.  They also pay strong attention to the [https://volatility.red/Sentiment_Analysis current market sentiment], have a lot of strong [Risk Management]] skills, keep up with a solid [[Trading Psychology]], and might use a tiny sliver of [[Technical Analysis]] thrown into the mix to help time an entry.
 
These players make up the largest portion of the [[trading]] volume making them the most influential traders in terms of [https://volatility.red/Price_Action_Analysis price movements] in the [[Forex]] and other financial markets.  They have access to virtually unlimited amounts of capital in some situations. 
 
Because these traders have access to so much money it highlights why we as retail traders should want to know how institutional traders think and trade.  Doing this will offer us opportunities to jump in on their trades and let them move the market with their huge buying and selling pressure.  This gives us a free ride along the way.  Just imagine if you knew what information the largest institutional traders in the world were watching and how they might look to trade that information.  You could literally just join them when the trade happens. 
 
There are many institutional traders that are execution-only traders which means that they are taking orders from their clients rather than making them a profit.  This is not the kind of institutional trader that we are referring to.  We are talking about the ones managing the world’s money and controlling the [https://volatility.red/Price_Action_Analysis price movements] in the markets.  We are only concerned with knowing what the real traders are thinking and how they intend to make a profit. 
 
 
===What is the difference between Institutional and Retail Traders?===
 
The major difference is in ''"How"'' an institutional trader approaches the markets when compared to how a retail trader approaches the markets.  The differences will become more apparent by drawing some comparisons. 
 
The retail trader usually starts, and inevitably ends their [[trading]] career, by utilizing some sort of [[Technical Analysis]] system that uses past [https://volatility.red/Price_Action_Analysis price behaviour], patterns, or indicators that attempt to predict future [https://volatility.red/Price_Action_Analysis price action].  This is in direct contrast to institutional traders who will almost never look at any sort of technical indicators or patterns to help give them an edge in their [[trading]].
 
Professional traders focus on fundamentals and [https://volatility.red/Sentiment_Analysis sentiment] with strong attention paid to managing risks and keeping proper [[Trading psychology]].  Retail traders focus on technical systems, [https://volatility.red/Price_Action_Analysis price] patterns, and indicators while typically lacking sound [[Risk Management]] and good [[Trading psychology]].  The only reference a retail trader typically makes about [[Trading psychology]] is to blame their bad psychology as the reason they can’t make a profit.  It’s a very typical thing for retail traders to blame the market for their losses rather than owning those losses.  A lot of people have a hard time considering that they are the one that is actually wrong because it’s just easier to blame the broker or the market. 
 
Institutional traders focus heavily on [[Risk Management]] and rarely use leverage.  If they do use leverage they are very careful about not risking more on that particular trade than they would if they had not used any leverage at all.  Retail traders look for [[Forex broker]]s that offer 200x, 500x, or even 1000x leveraged [https://volatility.red/The_Best_and_Most_Popular_Forex_Platforms_for_Demo trading accounts].  The idea the retail trader gets in their head is that if they really leverage up their trades they can turn something like $500 into $100,000 very quickly.  While this is possible, it is doubtful that this new retail trader has the necessary skill and training to pull that off.  They typically leverage up without considering that they might just lose their $500 a lot faster which is usually the case. 
 
Retail traders are typically far too undercapitalized to make enough money to support their basic needs.  This is what causes them to take excessive risks using way too much leverage.  This kind of behaviour inevitably leads to poor [[Trading psychology]] and bad habits that become difficult to break.  They miss the point that [[trading]] consistently in a professional manner while developing a proper track record is more important than making money.  You can’t trade with money you are scared to lose and expect to make millions.  That kind of pressure is too much for most people.  Institutional traders are typically well-backed with capital and receive more capital as they continue to show consistency and improve their track record. 
 
Institutional traders pay top [https://volatility.red/US_dollar dollar] for the fastest [https://volatility.red/Economic_data_releases news] feeds and audio squawk services available.  Examples of these are the two most well-known; the Bloomberg Terminal and Reuters Ikon.  They do this in order to get [https://volatility.red/Economic_data_releases market-moving news] and information faster than their competition.  Retail traders typically avoid [https://volatility.red/Economic_data_releases news] events and pay very little attention to [[Economic data releases]] because their [[trading]] patterns and technical systems fail during these times.  This is a shame because some of the best [[trading]] opportunities happen right around these [https://volatility.red/Economic_data_releases news events].  But, you obviously need to know how to trade them. 
 
Institutional traders focus heavily on developing and maintaining a healthy [[Trading psychology]] that keeps them razor-focused on the things that matter the most to their [[trading]] in real-time.  Retail traders focus on systems that attempt to remove [[Trading psychology]] and hopefully have a win rate of 100%. 
 
Are you starting to see the differences between a typical retail trader and institutional players?  For the most part, they do pretty much the opposite of each other.  And you also have to consider who actually makes money.  We can tell you from experience on both sides that retail traders are overall net negative compared to institutional traders. 
 
 
===Why should you learn the Institutional Way of Trading?===
 
Institutional traders are the masters of the universe when it comes to the [[Forex]] markets and other financial markets.  They are responsible for the vast majority of [https://volatility.red/Price_Action_Analysis price movements] in the markets because they simply have control over the most money going into and out of the financial assets.  As retail traders, we want to know what institutional traders are focussing on so that we can take advantage of the [https://volatility.red/Price_Action_Analysis price] swings they cause with their huge buy and sell orders.  As a retail trader, you never want to be on the wrong side of the flow of institutional money because you will simply get run over.  You would be foolish to think that you have a chance when a bus is barrelling at you 100 miles per hour.  It’s best to step aside or get behind the bus and enjoy piggybacking while it clears the road for you.
 
This brings up an interesting observation that we have seen countless times watching new and experienced retail traders alike for decades.  It’s absolutely crazy how often retail traders are on the wrong side of the fundamentals and [https://volatility.red/Sentiment_Analysis sentiment].  It's almost all the time.  This is because most indicators and technical systems use past [https://volatility.red/Price_Action_Analysis price] information to try to predict future [https://volatility.red/Price_Action_Analysis price direction] with no regard for the actual reasons ''"WHY"'' the [https://volatility.red/Price_Action_Analysis price] is moving the way it is. 
 
What we have noticed is that most of these indicators will tell you to buy when the [https://volatility.red/Price_Action_Analysis price] is “oversold”.  But what does oversold actually mean?  If there is a fundamentally bearish reason for the [https://volatility.red/Price_Action_Analysis price] to be going down then buying just because the indicator is saying the [https://volatility.red/Price_Action_Analysis price] is oversold makes absolutely no sense and puts you on the wrong side of heavy institutional selling.  Your indicator is too dumb to know when the bottom is in.  You’re probably going to get run over and you almost certainly do not have the skill to call the end of a fundamental move if you are using technical indicators.  This is exactly why most retail traders are perpetually on the wrong side of the market.  They are constantly buying at the times when the big boys and girls are selling.  You simply are going to lose against the big guys most of the time.  Sure you might get lucky from time to time and bank a few pips on some scalp trades against the fundamental move but over the long run being on the wrong side of the fundamentals and [https://volatility.red/Sentiment_Analysis sentiment] will keep your [https://volatility.red/The_Best_and_Most_Popular_Forex_Platforms_for_Demo trading account] in the red. 


Let us give you an example of a good friend of the creator of this Wiki that highlights this kind of behaviour.  He also happens to be an extremely successful businessperson. We will use the creator of this wiki's own words to highlight this story.


=='''[[The Basics of Fundamental Analysis]]'''==


My friend will ping me from time to time telling me about some amazing scalp trade that he just banked 4 or 5 pips on. Apparently, I missed the greatest move ever. 
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:


First off, I could not care less about 4 or 5 pips.  I regularly bank trades in excess of 50 to 100 pips or more as day trades.  My personal record is over 1,000 pips on GBPJPY short trade during Brexit that lasted a couple of hours.  I was doing this while all the technical traders were sitting on the sidelines watching the massive [https://volatility.red/Price_Action_Analysis price moves] and shaking in their boots.  Yes, it takes guts to trade an event like Brexit but you need to be there for the best opportunities because they can sometimes make your month. 
* [[The_Basics_of_Fundamental_Analysis#The_Basics_of_Fundamental_Analysis | The Basics of Fundamental Analysis]]
* [[The_Basics_of_Fundamental_Analysis#Fundamental_Analysis_and_Real_Life_Scenarios | Fundamental Analysis and Real Life Scenarios]]
* [[The_Basics_of_Fundamental_Analysis#A_Trader's_Personal_Story_on_Fundamentals | A Trader's Personal Story on Fundamentals]]


Back to my friend and his scalp trades.  The conversation inevitably goes something like this:


Friend:  I just banked 5 pips on a EURUSD trade, it was sweet pipskies. 
You can access the main Wiki for [[The Basics of Fundamental Analysis]] [[The Basics of Fundamental Analysis | HERE]].
Me:  Let me guess, you went long right? (Usually, I also put in that emoji that slaps itself in the face).
Friend:  Sure did!  There was a textbook cup and handle on the 1-minute chart.  Hit my take profit to the tick!
Me:  And now it’s 50 pips lower, you’re lucky you got out when you did or you would have gotten killed.  You realize that the European Central Bank just announced a massive quantitative easing program today and that the [https://volatility.red/Price_Action_Analysis price] is going down in a straight line right?  (Insert the emoji that smashes its head off a brick wall).
Friend:  Yeah I heard something about that.
Me:  So why would you take on so much risk and step in front of the falling knife like that?  This thing will probably be down 1000 pips by the end of the month! 
Friend:  I don’t understand that fundamental stuff you’re always talking about.
Me:  You should take the time to learn.  I’ve been in and out of the EURUSD short today twice and booked a total of 180 pips with almost no drawdowns and no risk.
Friend:  Seems like too much work.  I’ll stick with my cup and handle trades, they are easy money. Beers next week?


This kind of conversation happens all the time.  What he is really saying is that [https://volatility.red/Price_Action_Analysis price] has gone down too much and that it can’t go down anymore.  He is absolutely on the wrong side of the market every single time he makes a trade which makes the risk that he takes 100X greater than any trade I take.  This is because I know the reasons the market is moving and let the big boys do all the hard work for me.  I can also say when these tiny 5 pip scalp trades go wrong he will hold them for hundreds of pips offside.  At the time of this writing he is currently holding a GBPUSD trade long from 1.4400 and thanks to Brexit the [https://volatility.red/Price_Action_Analysis price] is currently sitting at 1.2400.  It doesn’t make a lot of sense to book 5 pip profits and hold trades 2000 pips offside but sadly a lot of people will do just that.  You would need to make 400 profitable 5 pip trades to pay for that 1 2000 pip loss.  That’s the same thing as saying you are going to be correct 99.95% of the time. 


It may seem like I’m making fun of my friend but I’m not.  He is a great person and definitely not the only person who thinks and trades like that.  I have seen so many people trade this way in the [[Forex]] market.  Fortunately for him, he has deep pockets and can hold positions 2000 pips offside.  But his [https://volatility.red/The_Best_and_Most_Popular_Forex_Platforms_for_Demo account] is down huge overall and he has had to deposit more money on several occasions to support his margin requirements with the broker. 
=='''[[Objections to Fundamental Analysis]]'''==


For most people, that kind of [[trading]] would have wiped out their [https://volatility.red/The_Best_and_Most_Popular_Forex_Platforms_for_Demo trading account] a long time ago.  I really think it makes the case to learn the fundamentals.  Also learning to trade for such a tiny amount of pips is probably a flawed idea because risk and reward just don’t add up with this idea.  There are plenty of decent moves with lots of pips to be had every day, you just have to learn to sit in a trade and let it develop. 
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:


End of trader's story.
* [[Objections_to_Fundamental_Analysis#Objections_to_Fundamental_Analysis | Objections to Fundamental Analysis]]
* [[Objections_to_Fundamental_Analysis#Objection_#1:_Applying_the_Fundamentals_is_Unnecessary_Because_You_Only_Need_to_Look_at_the_Charts | Objection #1: Applying the Fundamentals is Unnecessary Because you Only Need to Look at the Charts]]
* [[Objections_to_Fundamental_Analysis#Objection_#2:_Fundamentals_are_too_Difficult_Unless_you_have_a_High-Level_University_Degree | Objection #2: Fundamentals are too Difficult Unless you have a High-Level University Degree]]
* [[Objections_to_Fundamental_Analysis#Objection_#_3:_All_News_is_Priced_into_the_Markets | Objection # 3: All News is Priced into the Markets]]




Understanding how institutional traders trade will give you a true understanding of why the [https://volatility.red/Price_Action_Analysis price] has moved the way it has and where it may go in the near future.  This is what our job is as traders, picking where the currency pair will likely go soon and making some pips when it does.  But we do it with the understanding that this is how the overall market is going to trade it based on the fundamentals.
You can access the main Wiki for [[Objections to Fundamental Analysis]] [[Objections to Fundamental Analysis | HERE]].


If you are ever fortunate enough to stand around a water cooler at a hedge fund or an institutional [https://volatility.red/Trader_Scouting_and_Prop_Firms_Overview_and_Comparison trading floor] you will get a dose of reality in what you hear the traders and money managers talking about.  You will NEVER hear these professionals talking about how the MACD is showing positive divergence on the 512 tick chart with a bullish signal from the Ichimoku cloud or some other technical garble like that.  What you would hear will directly contradict the majority of the rubbish courses that you will find all over the internet. 


You will hear conversations about how low commodity demand from China is causing the Australian dollar to weaken or how one more positive CPI reading and the Federal Reserve will have no choice but to hike their benchmark interest rate at the next FOMC meeting.  You will hear all kinds of banter on how they can position their trades ahead of the next key economic risk event. 
=='''[[Institutional and Retail Traders]]'''==


There is a big difference in the way that a [[Institutional_and_Retail_Traders#What_is_a_Retail_Trader? | retail trader]] approaches the [[Forex]] or any other financial market from how a professional [[Institutional_and_Retail_Traders | institutional trader]] will go about navigating them.  In the following Wiki, we will explore concepts such as:


=='''Fundamental Supply and Demand'''==
* [[Institutional_and_Retail_Traders#What_is_a_Retail_Trader? | What is a Retail Trader?]]
* [[Institutional_and_Retail_Traders#What_is_an_Institutional_Trader? | What is an Institutional Trader?]]
* [[Institutional_and_Retail_Traders#What_is_the_difference_between_Institutional_and_Retail_Traders? | What is the difference between Institutional and Retail Traders?]]
* [[Institutional_and_Retail_Traders#Why_should_Traders_learn_the_Institutional_Way_of_Trading? | Why should Traders learn the Institutional Way of Trading?]]


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]].  Think of buying as demand and selling as supply.


'''Demand'''
You can access the main Wiki for [[Institutional and Retail Traders]] [[Institutional_and_Retail_Traders | HERE]].


When we have a situation where buyers are more aggressive than sellers this means [https://volatility.red/Price_Action_Analysis prices] will likely be bid up and move higher.  When we say bid up what we are referring to is a situation where buyers are more willing to “step up” their buy orders in the hopes of getting a fill on the long side.  Going long is the same thing as buying.  This is what we refer to as demand.  When more people want to buy at the current [https://volatility.red/Price_Action_Analysis price] this will cause the sellers to raise their offers to accommodate for the higher demand.  Essentially, when we have a high-demand situation buyers are more willing to purchase at higher [https://volatility.red/Price_Action_Analysis prices] and sellers are less willing to sell at lower [https://volatility.red/Price_Action_Analysis prices].  Aggressive buyers will simply lift the offers to get long instantly.  The other reason someone would want to lift the offer is to get out of an existing short position immediately.  If there is a very real reason for the market to be aggressively buying then you definitely do not want to be holding a short position against that positive [https://volatility.red/Sentiment_Analysis sentiment]. 


'''Supply'''
=='''[[Fundamental Supply and Demand]]'''==


On the other hand, if we have a market where the sellers are more aggressive than the buyers this means that [https://volatility.red/Price_Action_Analysis prices] will likely go down.  This is a situation where we have more supply than demand.  Buyers naturally want to buy at lower [https://volatility.red/Price_Action_Analysis prices] so they will lower their bids to accommodate for this influx of supply.  In this situation, sellers will be more willing to step down their offers.  Aggressive sellers will simply take the bids in order to get short immediately.  The other reason someone would want to take the bid would be to get out of their existing long positions.  The concept is the same, you don’t want to be stuck holding a position that is contrary to the current [https://volatility.red/Price_Action_Analysis price move] and [https://volatility.red/Sentiment_Analysis market sentiment] because you could wind up taking a much larger loss than you anticipated.
When discussing fundamental analysis there are some core principles that we need to be aware of.  [[Supply_and_Demand | Supply and demand]] are at the heart of fundamental moves in all markets including [[Forex]]. In the following Wiki we will explore:


'''Equilibrium'''
* [[Fundamental_Supply_and_Demand#Fundamental_Supply_and_Demand | Fundamental Supply and Demand]]
* [[Fundamental_Supply_and_Demand#Demand | Demand]]
* [[Fundamental_Supply_and_Demand#Supply | Supply]]
* [[Fundamental_Supply_and_Demand#Equilibrium | Equilibrium]]


At any one moment in time, the current [https://volatility.red/Price_Action_Analysis price] is thought to be the equilibrium between the forces of supply and demand.  As new information is absorbed and disseminated into the market buyers and sellers will move [https://volatility.red/Price_Action_Analysis prices] based on what this new information fundamentally means to the value of the asset that they are [[trading]].  This happens on a tick-by-tick basis every day.  [https://volatility.red/Sentiment_Analysis Sentiment] can and does change many times throughout a single trading session but to varying degrees.


You can access the main Wiki for [[Fundamental Supply and Demand]] [[Fundamental Supply and Demand | HERE]].


For further information on [[Supply and Demand]] please check out our Wiki page devoted to all things [[Supply and Demand]] [https://volatility.red/Supply_and_Demand HERE].


=='''[[Sentiment Analysis Overview from a Fundamental Perspective]]'''==


=='''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:


We have a large Wiki on [[Sentiment Analysis]] [https://volatility.red/Sentiment_Analysis HERE]. Here we will do a short explanation of [[Sentiment Analysis]].
* [[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]]


The other most common driver of fundamental information is something called [https://volatility.red/Sentiment_Analysis sentiment].  We have already mentioned [https://volatility.red/Sentiment_Analysis sentiment] a few times now but up to this point we have not provided a definition of what [https://volatility.red/Sentiment_Analysis sentiment] actually is. Let's try and break that down now.
You can access the main Wiki for [[Sentiment Analysis Overview from a Fundamental Perspective]] [[Sentiment Analysis Overview from a Fundamental Perspective | HERE]].


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. 


Well, we know that [[currency]] [https://volatility.red/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 [https://volatility.red/Price_Action_Analysis price] actually goes down against the fundamental trend.  In these times this means that the [https://volatility.red/Sentiment_Analysis sentiment] of the day has turned negative and forced [https://volatility.red/Price_Action_Analysis price] to be temporarily out of line with the big picture fundamentals. 
=='''[[Exchange rates | Exchange Rates]]'''==


[https://volatility.red/Sentiment_Analysis Sentiment], in its most basic form, is the ''"Mood"'' of the market right now in the ''"Current"'' trading session.  It’s similar to fundamentals except it lasts for much shorter periods of time.  [https://volatility.red/Sentiment_Analysis Sentiment] can be in line with the fundamentals but it can also move [https://volatility.red/Price_Action_Analysis price] in the opposite direction of the fundamentals.  The interesting thing about [https://volatility.red/Sentiment_Analysis sentiment] is that it can last anywhere from a few seconds to many weeks depending on how strong that [https://volatility.red/Sentiment_Analysis sentiment] is.
[[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 importance of this aspect of supply and demand cannot be underestimated.  [https://volatility.red/Sentiment_Analysis Sentiment] is so important that you will spend most of your time trying to identify the [https://volatility.red/Sentiment_Analysis current sentiment] for your [[trading]] opportunities.  This is especially true if you are a shorter-term trader such as a day trader. If you are a day trader you will need to be in tune with how the market is feeling all day while you are [[trading]]. 
* [[Exchange_rates#What_is_an_Exchange_Rate? | What an Exchange Rate is]]
* [[Exchange_rates#Exchange_Rate_Examples | Exchange Rate Examples]]
* [[Exchange_rates#The_Technical_Aspects_of_Exchange_Rates | The Technical Aspects of Exchange Rates]]
* [[Exchange_rates#Exchange_Rate_Pricing_Theories | Exchange Rate Pricing Theories]].
* [[Exchange_rates#Central_Banks_and_Exchange_Rates | Central Banks and Exchange Rates]]


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 current trading session. 
The very best trades happen are when the [https://volatility.red/Sentiment_Analysis current sentiment] is in line with the big picture fundamentals.  These are the easiest trades because you have the power of the longer-term investors using the fundamentals and the shorter-term hedge fund traders using the [https://volatility.red/Sentiment_Analysis sentiment] all pushing the [https://volatility.red/Price_Action_Analysis price] together in the same direction.  This is when you can make a lot of pips very quickly with trades that never try to go against you.  This is one of the most important concepts traders should learn. 
The very best trades look like the following:
* If fundamentals + and [https://volatility.red/Sentiment_Analysis sentiment] + then buy all day long at good buy points.
* If fundamentals – and [https://volatility.red/Sentiment_Analysis sentiment] – then sell/go short all day long at good sell points.
These are the type of trades that tend to last longer and move more in terms of pips or [https://volatility.red/Price_Action_Analysis price].  These are the trades that can make you a lot of money if you know how to identify the long-term fundamentals combined with the [https://volatility.red/Sentiment_Analysis sentiment] of the day properly.
Good trades look like the following:
If fundamentals are ''"Positive"'' and [https://volatility.red/Sentiment_Analysis sentiment] is ''"Negative"'' you have 2 options:
# Allow the negative [https://volatility.red/Sentiment_Analysis sentiment] to bring the [https://volatility.red/Price_Action_Analysis price] back to where it makes fundamental sense to start buying again.
# Trade the negative [https://volatility.red/Sentiment_Analysis sentiment] short against the positive fundamentals.  This is where knowing how strong [https://volatility.red/Sentiment_Analysis sentiment] is will help you make some profitable trades against the big-picture fundamentals.
If fundamentals are ''"Negative"'' and [https://volatility.red/Sentiment_Analysis sentiment] is ''"Positive"'' you have 2 options:
# Allow the positive [https://volatility.red/Sentiment_Analysis sentiment] to bring the [https://volatility.red/Price_Action_Analysis price] back to where it makes fundamental sense to start selling again.
# Trade the positive [https://volatility.red/Sentiment_Analysis sentiment] long against the positive fundamentals.  This is where knowing how strong [https://volatility.red/Sentiment_Analysis sentiment] is will help you make some profitable trades against the big-picture fundamentals.
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 [https://volatility.red/Price_Action_Analysis prices] in a direction that the markets don’t appear to want.  Five billion [https://volatility.red/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 [https://volatility.red/Forex FX] volume in the London trading session alone.  But, when all of the big players agree that [https://volatility.red/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 [https://volatility.red/The_Best_and_Most_Popular_Forex_Platforms_for_Demo trading account].
In later Wikis, we will expand on the concept of [https://volatility.red/Sentiment_Analysis sentiment] and give you the tools and strategies you need to trade with [https://volatility.red/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 [https://volatility.red/Sentiment_Analysis sentiment] that you determine by [[Sentiment Analysis]] is the mood or the market right now in the current trading session.  [https://volatility.red/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. 
=='''Exchange Rates'''==
[[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 this Wiki, you will learn about [https://volatility.red/Exchange_rates#What_is_an_Exchange_Rate? What an Exchange Rate is], [https://volatility.red/Exchange_rates#Exchange_Rate_Examples Exchange Rate Examples], [https://volatility.red/Exchange_rates#The_Technical_Aspects_of_Exchange_Rates The Technical Aspects of Exchange Rates], How Exchange Rates are priced and [https://volatility.red/Exchange_rates#Exchange_Rate_Pricing_Theories Exchange Rate Pricing Theories].


The main page for [[Exchange rates]] is found here: [[Exchange rates]]
The main page for [[Exchange rates]] is found here: [[Exchange rates]]
Line 345: Line 91:
=='''Money Supply'''==
=='''Money Supply'''==


We have a separate Wiki on [https://volatility.red/Central_banks#Monetary_Policy_and_Money_Supply Money Supply] so please click on the links to take you to those specific Wikis to obtain this information.
We have a separate Wiki on [[Central_banks#Monetary_Policy_and_Money_Supply | Money Supply]] so please click on the links to take you to those specific Wikis to obtain this information.


The main page for [https://volatility.red/Central_banks#Monetary_Policy_and_Money_Supply Money Supply] is found here: [https://volatility.red/Central_banks#Monetary_Policy_and_Money_Supply Money Supply]
The main page for [[Central_banks#Monetary_Policy_and_Money_Supply | Money Supply]] is found here: [[Central_banks#Monetary_Policy_and_Money_Supply | Money Supply]].




=='''[[Intermaket Analysis]]'''==
=='''[[Intermaket Analysis]]'''==


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.
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:


We have a dedicated Wiki for [[Intermarket Analysis]] which covers subjects such as the [https://volatility.red/Intermaket_Analysis#The_Link_between_Bonds_and_Stocks Links between Bonds and Stocks], The [https://volatility.red/Intermaket_Analysis#The_Link_between_Commodities_and_Bonds Links between Commodities and Bonds], [https://volatility.red/Intermaket_Analysis#Deflation_and_its_Effects Deflation and its Effects] and much more.
* [[Intermaket_Analysis#Overview_of_Intermarket_Analysis | Overview of Intermarket Analysis]]
* [[Intermaket_Analysis#The_Link_between_Bonds_and_Stocks | Links between Bonds and Stocks]]
* [[Intermaket_Analysis#The_Link_between_Commodities_and_Bonds | Links between Commodities and Bonds]]
* [[Intermaket_Analysis#Deflation_and_its_Effects | Deflation and its Effects]]


The main Wiki on [[Intermarket Analysis]] can be found [https://volatility.red/Intermaket_Analysis HERE].
The main Wiki on [[Intermaket Analysis]] can be found [[Intermaket_Analysis | HERE]].




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=='''Fundamentals and Sentiment'''==
=='''[[Fundamentals and Sentiment]]'''==


You may recall that the fundamentals, particularly for [https://volatility.red/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 [https://volatility.red/Economic_data_releases#Specific_Economic_Indicators economic indicators] to determine the state of the economy and then implement the various 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.


You can access the main Wiki for [[Fundamentals and Sentiment]] [[Fundamentals and Sentiment | HERE]].


To explain this effectively we have to break the concepts of this analysis down into two distinct parts:


# '''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 [https://volatility.red/Central_banks#Australia_%E2%80%93_The_Reserve_Bank_of_Australia_(RBA) central bank of Australia] is concerned with. 
=='''Central Banks'''==
# '''Sentiment:'''  What we haven’t looked at too much are the things that are driving the [https://volatility.red/Price_Action_Analysis price] right this moment in the here and now.  This is called [https://volatility.red/Sentiment_Analysis sentiment] and is the most important thing you need to concern yourself with if you are considering becoming or are a day trader.


Therefore, we have two core elements that we must be in tune with at all times; the underlying fundamentals and the ever-changing [https://volatility.red/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. 
[[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:


The simplest way to understand the difference between fundamentals and [https://volatility.red/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 [https://volatility.red/Price_Action_Analysis prices] over weeks and months.  [https://volatility.red/Sentiment_Analysis Sentiment], on the other hand, are the short-term things that the market participants are obsessing over that are driving [https://volatility.red/Price_Action_Analysis prices] over hours and days in the current session and beyond. 
* [[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#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#Monetary_Policy_and_Money_Supply | Monetary Policy and Money Supply]]
* [[Central_banks#Central_Bank_Monetary_Policy_Tools | Central Bank Monetary Policy Tools]]
* [[Central_banks#Hawks_and_Doves | Hawks and Doves]]
* [[Central_banks#Major_Central_Banks | Major Central Banks]]


Of course, [https://volatility.red/Sentiment_Analysis sentiment] can take over in the short term and move the [https://volatility.red/Price_Action_Analysis price] against the big picture fundamental trend. However, as long as the core principles remain in play the trend will typically resume at some point when the [https://volatility.red/Sentiment_Analysis sentiment] wares off and fades away from the market's memory. 


The market tends to have a short-term memory when it comes to [https://volatility.red/Sentiment_Analysis sentiment].  This means that the [https://volatility.red/Sentiment_Analysis sentiment] must be very strong to drive [https://volatility.red/Price_Action_Analysis prices] for more than a couple of days.  It's pretty common for the market to get really concerned with a [https://volatility.red/Economic_data_releases specific news item] and move [https://volatility.red/Price_Action_Analysis prices] hard in one trading session only to completely reverse that move the next session because there is some new piece of information that the market is focussing on instead. 
The main Wiki page for [[Central banks | Central Banks]] is found here: [[Central banks | Central Banks]]
 
Understanding that the [https://volatility.red/Sentiment_Analysis sentiment] can be with or against the big picture fundamentals is key.  But the best trades will always be when the [https://volatility.red/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 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 [https://volatility.red/Sentiment_Analysis sentiment] is opposite the fundamentals because the market tends to forget about the fundamentals when there is a reason to think differently. 
 
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 [https://volatility.red/Sentiment_Analysis sentiment] as an opportunity to trade the longer-term trend at a much more attractive [https://volatility.red/Price_Action_Analysis price].  This means that these traders wait for a situation when the [https://volatility.red/Sentiment_Analysis sentiment] is actually opposite to that of the fundamental trend.  This causes [https://volatility.red/Price_Action_Analysis prices] to correct in the short term setting up nice opportunities to get in the fundamental trend at a better [https://volatility.red/Price_Action_Analysis price].  At the same time, other traders may take advantage of the counter-trend [https://volatility.red/Sentiment_Analysis sentiment] and trade in line with it to make a quick profit.   
 
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. 
 
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 trade is and how likely it is for that trade to yield a profit.  With time and practice your conviction levels will naturally increase making your [[trading]] comfortable and seem like second nature. 
 
If you have a high level of conviction in a 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. 
 
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 trade to determine both the underlying fundamentals and the short-term [https://volatility.red/Sentiment_Analysis sentiment] because your conviction level will directly influence your level of [[Trading psychology]] while you are in a position.  The more factual reasons you can find to support a 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.
 
 
=='''Central Banks'''==
 
[https://volatility.red/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 [https://volatility.red/Central_banks Central Banks].


In this Wiki you will learn all about the [https://volatility.red/Central_banks#Major_Central_Banks major Central Banks] and their structure and [https://volatility.red/Central_banks#A_Brief_History_of_Central_Banks history], [https://volatility.red/Central_banks#Central_Banks_and_Interest_Rates Interest Rates], [https://volatility.red/Central_banks#Monetary_Policy_and_Money_Supply Monetary Policy and Money Supply], [https://volatility.red/Central_banks#Central_Bank_Monetary_Policy_Tools Central Bank Monetary Policy Tools], [https://volatility.red/Central_banks#Hawks_and_Doves Hawks vs Doves] and so much more.


The main Wiki page for [[Central banks | Central Banks]] is found here: [[Central banks | Central Banks]]
=='''[[Economic data releases | Economic Data Releases]]'''==


Just like [[Central_banks | Central Banks]], [[Economic data releases | 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:


=='''Economic Data Releases'''==
* [[Economic_data_releases#Economic_Data_Primer | Economic Data Primer]]
* [[Economic_data_releases#The_Importance_of_Globalization | The Importance of Globalization]]
* [[Economic_data_releases#How_to_know_when_Economic_Data_is_Released | How to know when Economic Data is Released]]
* [[Economic_data_releases#What_Traders_Need_to_Know_about_Economic_Data | What Traders Need to Know about Economic Data]]
* [[Economic_data_releases#The_Expectations_of_Data_is_Critically_Important | The Expectations of Data is Critically Important]]
* [[Economic_data_releases#Economic_Data_and_Economic_Cycles | Economic Data and Economic Cycles]]
* [[Economic_data_releases#Economic_Data_Types | Economic Data Types]]
* [[Economic_data_releases#Specific_Economic_Indicators | Specific Economic Indicators]]
* [[Economic_data_releases#Economic_Indicator_Pre-Trade_Considerations | Economic Indicator Pre-Trade Considerations]]


Just like [https://volatility.red/Central_banks Central Banks], [[Economic data releases | Economic Data Releases]] are so important to all financial markets that we have created a separate Wiki for them. In this Wiki we will explore [https://volatility.red/Economic_data_releases#How_to_know_when_Economic_Data_is_Released How and When Economic Data is Released], [https://volatility.red/Economic_data_releases#The_Expectations_of_Data_is_Critically_Important Expectations of Economic Data], [https://volatility.red/Economic_data_releases#Economic_Data_and_Economic_Cycles Economic Data and Economic Cycles], [https://volatility.red/Economic_data_releases#Types_of_Economic_Data Types of Economic Data], [https://volatility.red/Economic_data_releases#Specific_Economic_Indicators Specific Economic Indicators] and so much more.


The main Wiki page for [[Economic data releases | Economic Data Releases]] is found here: [[Economic data releases | Economic Data Releases]]
The main Wiki page for [[Economic data releases | Economic Data Releases]] is found here: [[Economic data releases | Economic Data Releases]]




=='''How the Forex Market Relates to other Markets'''==
=='''[[How the Forex Market Relates to other Markets]]'''==


We will now look at the concept of Intermarket analysis which we devoted some time to in previous sections.
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:


Despite our sole intention of making a profit, we play a much more important role than is commonly thought.  We as [https://volatility.red/Speculating | Speculators] provide the market with large amounts of important liquidity and make the market far more efficient for all market participants to trade within. 
* [[How_the_Forex_Market_Relates_to_other_Markets#Bonds | Bonds]]
* [[How_the_Forex_Market_Relates_to_other_Markets#Commodities | Commodities]]
* [[How_the_Forex_Market_Relates_to_other_Markets#Equities | Equities]]


It’s worth repeating that without [https://volatility.red/Speculating Speculators] just like us the global financial markets would grind to a complete halt almost overnight.  This would cause industry, agriculture, and businesses around the world to fail quickly.  This highlights the importance of why we need to take our position as [https://volatility.red/Speculating Speculators] very seriously.  It also helps to prepare us to not have any negative preconceptions such as those that the media puts on us [https://volatility.red/Speculating Speculators].  Having this understanding can give us the confidence to participate profitably and successfully. 


[https://volatility.red/Speculating Speculators] contribute to all markets and generate [https://volatility.red/Price_Action_Analysis price movements] across a broad range of asset classes.  There are no modern markets where [https://volatility.red/Speculating speculators] don't play an important role in the overall structure and success of the particular market.  
You can access the main Wiki for [[How the Forex Market Relates to other Markets]] [[How the Forex Market Relates to other Markets | HERE]].




===Bonds===
=='''[[Economic Cycles]]'''==


If you are interested in financial markets you have no doubt heard of bonds and likely have an idea of what they are.
[[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:


A bond is simply a form of a loan.  For example, you would borrow money from a bank but for a very large company or government, this would be impossible because banks are not in a position to lend such huge amounts of money safely while keeping their books balanced.  It would be pretty crazy to think of thousands of companies going to banks and asking them for hundreds of billions of [https://volatility.red/US_dollar dollars] to borrow.  Instead of taking a loan from a bank these large governments and companies raise money by splitting that loan between thousands of investors on the open market in the form of a bond. 
* [[Economic_Cycles#State_of_the_Economy | State of the Economy]]
* [[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_Data_and_Economic_Cycles | Economic Data and Economic Cycles]]
* [[Economic_Cycles#Indicators_within_the_Economic_Cycle | Indicators within the Economic Cycle]]


Any entity offering bonds to an investor is called an issuer.  In exchange for this investor money, the government or company will promise to pay the money back at a certain date in the future which is known as the maturity date.  They will also pay the investor a rate of interest to make it worth their while for parting with their money.  This interest payment is called the coupon. 


Bonds are known as fixed income securities because the amount of money the investor will receive at the end of the loan is known in advance and guaranteed by the issuer.  The coupon is paid either once or twice per year depending on how the issuer has set up the bond. 
Please refer to the Wiki for further information on [[Economic Cycles]].
 
At the end of the agreed lending period, the investor receives its original investment amount back.  For example, you may buy a bond with a face value of $1,000 that has a maturity of 10 years and a coupon of 8%.  This means that you will receive $80 per year for 10 years and then you will get your original $1,000 back at the end of the tenth year. 
 
When purchasing a bond you are essentially purchasing debt in exchange for getting a specific yield. 
 
 
There are two main types of bonds:
 
# '''Corporate bonds:'''  These are issued by companies to raise money for things such as new plants and materials or to fund expansion projects.
# '''Government bonds:'''  These are issued by governments to raise money for things like social programs or infrastructure projects.  They could also be raising more money to pay off existing bonds and debt obligations.  Many larger first world governments are in a situation where a huge part of their borrowing gores to pay off past debt.
 
For our purposes, the most important type of bond is a government bond because these are directly influenced by interest rates.  This of course ties them in perfectly with [https://volatility.red/Forex FX] [[trading]].  The entire [https://volatility.red/Forex FX] world revolves around interest rates and interest rate expectations for the future of economies. 
 
Because governments are very dependable and stable in most first-world nations the chances of them not paying the coupon or the original face value are relatively low.  This makes bonds a low-risk investment.  Because bonds are bought and sold on the open market it means that you can buy a bond rather easily but also sell it to another investor at any time before the maturity date if you need to. 
 
Some people get confused about the [https://volatility.red/Price_Action_Analysis price] of a bond and the yield of the bond.  When pricing bonds it’s important to remember that the face value is the [https://volatility.red/Price_Action_Analysis price] that is returned to the investor at the maturity date.  The [https://volatility.red/Price_Action_Analysis price] of the bond is how much it would cost an investor to buy it from another investor before that maturity date. 
 
When a bond is [[trading]] at a [https://volatility.red/Price_Action_Analysis price] above its face value then it is said to be [[trading]] at a premium.  Whereas when it's [[trading]] below its face value then it's said to be [[trading]] at a discount. 
 
The interest coupon can be set at a fixed interest rate that is tied to the face value.  For example, if you buy a bond for $1,000 at a fixed rate of 10% you will receive $100 each year no matter what happens to the [https://volatility.red/Price_Action_Analysis price] of the bond in the markets.  In the case of U.S. Treasuries, it can be tied to fluctuating interest rates or indexes.  The [https://volatility.red/Price_Action_Analysis price] of bonds with a lower coupon tends to fluctuate more while the higher coupon bonds tend to be a lot more stable. 
 
The maturity date can be anything from one day to 10 years and sometimes can even be as high as 100 years.  This was the case in Mexico in 2015 when they launched the world’s first ever 100-year bond priced in Euros.  The length of the maturity will also dictate what [https://volatility.red/Price_Action_Analysis price] it is because a bond with a 1 year maturity is much more predictable than a bond that matures in 100 years.  In general, the longer the time to maturity the higher the interest rate will be. 
 
This all revolves around risk and the higher the perceived risk the higher the coupon will pay to compensate investors for the higher amount of risk they are taking.  To help investors navigate these risks there are several special bodies that exist to alert investors of the highest and lowest risk companies and government bonds available.  This is aimed to help investors make better decisions on investments based on their own individual risk tolerances. 
 
The three largest credit rating agencies are [https://www.moodys.com/ | Moodys], [https://www.fitchratings.com/ | Fitch], and [https://www.spglobal.com/ratings/en/products-benefits/products/credit-ratings | S&P].  The market will pay close attention to what these agencies say and how they rate each issuer.  They have several rating levels that split each issuer into either investment grade or junk grade.  Issuers with a multiple A rating are considered the highest quality to invest with while BBB to single A ratings is still strong. 
 
Anything that has a rating below BBB is considered speculative and much higher risk.  These are commonly referred to as junk bonds. 
 
Governments and their bonds that are rated as junk are not necessarily safe and must offer a much higher yield in order to tempt investors to part with their money.  The most confusing part of the story of bonds to most traders is that there seem to be so many different [https://volatility.red/Price_Action_Analysis prices] to measure.  So let's try to simplify this. 
 
When you are reading through [https://volatility.red/Economic_data_releases news] articles and [https://volatility.red/Economic_data_releases news] feeds you will often hear analysts talking about something called the yield.  The yield is simply the coupon amount divided by the [https://volatility.red/Price_Action_Analysis price] of the bond.  To understand this better we will use an example to explain it.  To do this we are going to over-simplify the process slightly but it will give you a good general idea of the point we are trying to get at. 
 
Imagine you buy a bond with a face value of $1,000 and a coupon of 10%.  If the [https://volatility.red/Price_Action_Analysis price] remains $1,000 then the yield is simply $100 per year.  However, if the [https://volatility.red/Price_Action_Analysis price] of the bond goes down to $800 the yield now increases to 12.5% because the coupon payment is based on 10% of the original face value of the bond which was $1,000.  This means that you will receive $100 per year on an $800 bond which is obviously higher than 10%.  The math works out by taking the $100 original yield and dividing it by the new [https://volatility.red/Price_Action_Analysis price] of $800 which equals 12.5%.
 
The reverse is true if the [https://volatility.red/Price_Action_Analysis price] of the bond goes up instead of down.  For example, if the [https://volatility.red/Price_Action_Analysis price] of the bond goes from the original face value of $1,000 up to $1,200 then the new yield is actually 8.3% because you had to pay more for the bond than the face value. 
 
It's due to this effect that when trying to simplify the relationship between the [https://volatility.red/Price_Action_Analysis price] of the bond and the yield of the bond we can say that when the [https://volatility.red/Price_Action_Analysis price] of the bond goes up the yield goes down and when the [https://volatility.red/Price_Action_Analysis price] of the bond goes down the yield goes up. 
 
If you are in the market for buying bonds your primary concern is gaining a high yield but if you are a bondholder and already have your yield locked in then you would like to see the [https://volatility.red/Price_Action_Analysis price] of the bonds increase so that you can have the option of cashing out for a much bigger profit later on.  There is nothing better to a bond trader than getting a nice yield for a while and then cashing in on a profit for a higher face value.


The primary thing that we need to appreciate when thinking about bonds is the relationship with interest rates because they are just as important to bond markets as they are to [https://volatility.red/FX_market FX markets].  When interest rates rise the [https://volatility.red/Price_Action_Analysis price] of bonds in the markets fall.  This raises the yield of older bonds to bring them into line with the new bonds that are being issued with higher coupons. 


When interest rates fall the [https://volatility.red/Price_Action_Analysis price] of the bonds rise which lowers the yield of older bonds to bring them into line with newer bonds being issued with lower coupons.  That’s why bonds are so affected by interest rate adjustments by [[Central banks]].  These rate adjustments also increase the [https://volatility.red/Speculating speculation] around bonds which causes plenty of [https://volatility.red/Price_Action_Analysis price] volatility. 
==Related Wikis==


Readers of '''Fundamental Analysis''' also viewed:


There are 3 types of government bonds:
* [[Fundamental and Sentiment Trading Strategies]]
 
* [[Sentiment Analysis]]
# '''Bills:'''  These mature in less than one year.
* [[Risk Management]]
# '''Notes:'''  These mature between 1-10 years.
* [[Central banks]]
# '''Bonds:'''  These mature longer than 10 years.
* [[Monetary Policy Tools]]
 
 
All of these marketable securities issued by the U.S. government are collectively known as treasuries.  This makes the three types of bonds listed previously referred to as treasury bills, treasury notes, and treasury bonds. 
 
US bonds are widely watched in the markets because they are regarded as the safest form of investment available.  This is because they are issued directly by the U.S. government.  These bonds or treasuries are also known as the [https://volatility.red/Risk#Risk-Free_Rate risk free rate] because they are considered to be free from risk.  It's not to say that the U.S. government can never default on its debt obligations but the market regards this as so unlikely that they are willing to call U.S. treasuries the [https://volatility.red/Risk#Risk-Free_Rate risk free rate]. 
 
Other first-world governments are regarded as being extremely safe.  For example, the United Kingdom has never defaulted on its debt in its very long history on the global financial scene. 
 
Because of the secure nature of bonds, and the fact that they can provide a guaranteed payout, they are extremely popular with large investment and pension funds around the world that are looking to ensure growth and income in the safest way possible.
 
 
Bond markets relate to [https://volatility.red/Forex FX] on two main levels:
 
# '''They have a co-dependency on interest rate fluctuations and [https://volatility.red/Speculating speculation]:'''  This means that by watching the bond markets we can sometimes get clues as to whether or not similar moves may happen in [https://volatility.red/Forex FX]. 
# '''The demand produced by attractive bond yield:'''  For example, during times of increased risks, or low domestic yields, large funds may decide to invest in the bonds of a foreign government.  An example of this is when a UK pension fund decides to buy some US treasuries in order to protect them from being overly exposed to UK assets.  To do this they first need to buy [https://volatility.red/US_dollar U.S. dollars] and sell their British pounds in exchange.  This means that in order to trade the bond market they must first trade in the [[FX market]].  In very large volumes this can have a temporary impact on the [https://volatility.red/Price_Action_Analysis price] of various currency pairs which is why it's important for us to be aware of it.
 
===Commodities===
 
So when we say commodities what are we actually referring to?  Basically, commodities are raw products that typically come from nature.  For our purposes here we are only going to talk about commodities that can be bought or sold on an exchange.  There are loads of different types of commodities being traded in the financial markets from oil, gold, corn, milk, wheat, and so on. 
 
As with most markets, the bulk of volume comes from us [https://volatility.red/Speculating speculative traders] who are simply betting on the [https://volatility.red/Price_Action_Analysis price] of the commodity going up or down.  But as we have previously looked at, this type of [https://volatility.red/Speculating speculative activity] provides the commodity markets with much better [https://volatility.red/Price_Action_Analysis prices] to buy and sell from.  People and companies, such as farmers and industrial producers rely heavily on there being adequate liquidity so that their businesses function smoothly. 
 
Traders most commonly trade commodities via a futures contract.  Commodities can be traded via a host of different instruments such as spot [https://volatility.red/Price_Action_Analysis prices], options, ETFs, etc. 
 
There are many different types of commodities all traded individually from one another.  This [[trading]] is based on external factors such as supply and demand.  However, the relationship between certain commodities and currencies is mainly based on how much of an impact the [https://volatility.red/Price_Action_Analysis price movements] on the commodities will impact the overall economic performance of the nation producing or importing them. 
 
Let's use the Canadian dollar to demonstrate this.  Canada is a major producer of oil and it’s one of the country’s largest exported products.  So if the [https://volatility.red/Price_Action_Analysis price] of oil falls significantly over a sustained period of time then eventually this will start to reduce the amount of money that Canada makes on its oil.  This will ultimately start negatively affecting [https://volatility.red/Economic_data_releases economic data figures] such as [https://volatility.red/Economic_data_releases#Gross_Domestic_Product GDP] and other growth metrics within Canada.  If the economy stagnates and inflation starts falling then the [https://volatility.red/Central_banks#Canada_%E2%80%93_The_Bank_of_Canada_(BOC) Bank of Canada] may be forced to cut its interest rates which in turn will cause the [[currency]] to devalue.  This is why the [https://volatility.red/Price_Action_Analysis price] of oil is of great concern to traders holding Canadian dollars.  Traders want to know what is happening in the oil markets and the reasons why so they can determine how much of an impact it will have on the future value of the Canadian dollar. 
 
 
When it comes to [https://volatility.red/Forex FX] the key to understanding the correlation to commodity [https://volatility.red/Price_Action_Analysis prices] lies in two key areas:
 
# Knowing which countries have heavy dependencies on either selling or buying commodities.
# Being tuned into how much focus the market is giving to moves on those commodities at any given time. 
 
 
The truth is that commodity [https://volatility.red/Price_Action_Analysis prices] move around every day but not all of these moves will impact [https://volatility.red/Forex FX] [https://volatility.red/Price_Action_Analysis prices].  This is because they may not cause the market to have any fears or hopes about the longer-term impact on the country’s economy. 
 
For example, if oil [https://volatility.red/Price_Action_Analysis prices] fall hard in a single session because of some kind of announcement from [https://www.opec.org/opec_web/en/ | OPEC], this may not necessarily cause any large moves on the Canadian dollar.  However, if oil moves in a strong downtrend and the market feels there is a very good fundamental reason for this to continue then this could lead to more concern from the [[FX market]] as the uncertainty of that could lead to panic selling of the Canadian dollar.  This panic selling could lead to more aggressive selling if there is negative data coming out of Canada as a result of the [https://volatility.red/Price_Action_Analysis price move] lower in oil.  This will in term affect inflation negatively which is going to concern the [https://volatility.red/Central_banks#Canada_%E2%80%93_The_Bank_of_Canada_(BOC) Bank of Canada] who may be forced to take action.  This might lead to the market [[Speculating]] on an interest rate cut before the [Central banks] is prepared to announce a cut. 
 
It's worth mentioning again that the [https://volatility.red/Speculating speculation] around interest rate cuts is just as important, if not more important than the interest rate cut itself.  This is a really important point.  The expectations of a risk event are just as, if not more, important than the actual risk event when it happens. 
 
The same principles apply Australian dollar.  It’s a huge exporter of iron ore and copper.  If the [https://volatility.red/Price_Action_Analysis prices] in these commodities change over time it could have both a negative or positive effect on the [https://volatility.red/Price_Action_Analysis price] of the Australian dollar. 
 
Another example is that of New Zealand which is a large exporter of dairy.  Dairy makes up a big chunk of New Zealand’s GDP.  So if we have changing dairy [https://volatility.red/Price_Action_Analysis prices] over time this too could have a positive or negative effect on the [https://volatility.red/Price_Action_Analysis price] of the Kiwi. 
 
The key is not just to watch the commodity chart or try and trade a correlation, but to tune into the market’s reaction so that you can gauge how seriously the reasons for the move are being taken by the market and what the expected impact could be on the nation’s economy. 
 
The main reason traders get confused when trying to conduct Intermarket analysis is that they try and interpret each move as a fixed rule. They get trapped into thinking that if oil goes up then the Canadian dollar must go up as well.  The reality is that most of the time the markets might not even bat an eyelid at oil [https://volatility.red/Price_Action_Analysis prices].  But then all of a sudden the market becomes obsessed with oil causing the Canadian dollar and oil to become very closely correlated.  This will happen until the market forgets about it and moves on to the next major concern or market hype. 
 
Just remember that the market is made of people and people can be fickle and irrational.  This is why it’s important for you to keep an eye on commodity [https://volatility.red/Price_Action_Analysis prices] and how they relate to certain currencies.  However, most of your analysis should be [https://volatility.red/Economic_data_releases news] and [https://volatility.red/Sentiment_Analysis sentiment] based rather than [https://volatility.red/Price_Action_Analysis price].
 
 
===Equities===
 
Equities are securities such as stocks or shares of companies from around the world.  Traders use the stock market to gauge how well overall market participants are expecting the economy of that particular nation to perform.  If the market is expecting the economy to do well and the growth to accelerate then the stock market will generally rally and push higher.  This is also true if the market is expecting the nation’s outlook to be weak as the market will sell the companies within the nation’s indexes.  At its most basic form, some economists define a strong economy as having a strong stock market. 
 
As with commodities, this is not an exact science and most of the time the [https://volatility.red/FX_market FX markets] will trade off its own issues leaving stocks to move in their own way.  At other times the [[Forex]] market will become obsessed with something happening in the equities market. 
 
For example, maybe there is a big sell-off in a country’s stock market.  If the selloff gets out of control this will likely creep over into to [https://volatility.red/FX_market FX markets].  When traders in the [[FX market]] get concerned they buy up safe haven currencies and sell off currencies that are considered to have more risk.  This is exactly the type of scenario that tends to occur to bring both of these markets into the spotlight at the same time.  A good example is when the stock market goes completely risk off because of some sort of major concern.  This will cause safe haven currencies to benefit as traders look for safety. 
 
Stocks can also be impacted by [https://volatility.red/Forex FX].  For example, if a company has many offices or manufacturing plants around the world then they will need to buy the local [[currency]] in those countries in order to pay their staff in those different countries.  If the [https://volatility.red/Price_Action_Analysis price] of the local [[currency]] rises faster than the company’s home [[currency]] this could cause the company's profits to fall because it’s costing them too much to buy the local [[currency]]. This will negatively impact the profit performance of the stocks in question. 
 
Also, if these transactions that companies make are large enough they can have a limited impact on [[currency]] [https://volatility.red/Price_Action_Analysis prices] in the short term as they sell their home [[currency]] to buy the foreign [[currency]]. 
 
Another thing that could impact a company is if a central bank implements a sustained campaign of dovish behaviour leading to the depreciation of its [[currency]] over a period of months or years.  This can impact the future earning potential of companies that export a lot of products abroad.  The depreciation of the [[currency]] can give those exporting companies a more competitive edge because the cost of developing their goods is now less and continuing to fall.  This potentially means more profits and higher dividends leading to a higher share [https://volatility.red/Price_Action_Analysis price].
 
As you can see, all markets can be interrelated on many levels and one does not always lead the other and none of them are necessarily related at all.  However, when the market has a concern or an idea in its mind the correlations can be very powerful and lead to some excellent [[trading]] opportunities. 
 
The main point of this section is to introduce you to the concept of Intermarket analysis but also to stop you from getting overly caught up in the rules of how each market is connected.  The best thing to do is to mostly focus on using the market’s reaction to tell you when you should be focused on a particular correlation. 
 
 
=='''Economic Cycles'''==
 
[[Economic Cycles]] are such an important and vast subject that we have a separate Wiki dedicated to all things on [[Economic Cycles]].
 
In this Wiki on [[Economic Cycles]] you will learn about the [https://volatility.red/Economic_Cycles#State_of_the_Economy State of the Economy], [https://volatility.red/Economic_Cycles#Inflation Inflation], [https://volatility.red/Economic_Cycles#Deflation Deflation] and [https://volatility.red/Economic_Cycles#Hyperinflation Hyperinflation]. We will also explore the [https://volatility.red/Economic_Cycles#Economic_Cycles_and_the_4_Phases Four Phases of the Economic Cycle] from the [https://volatility.red/Economic_Cycles#1_Expansion Expansion], [https://volatility.red/Economic_Cycles#2_Peak Peak], and [https://volatility.red/Economic_Cycles#3_Recession Recession] right through to the [https://volatility.red/Economic_Cycles#4_Trough Trough]. We will then turn our attention to how [https://volatility.red/Economic_Cycles#Indicators_within_the_Economic_Cycle economic data] impacts and is impacted by the economic cycle. Rounding out the Wiki on [[Economic Cycles]] we will explore [https://volatility.red/Economic_Cycles#Leading_(Cyclical)_Indicators Leading], [https://volatility.red/Economic_Cycles#Lagging_Indicators Lagging] and [https://volatility.red/Economic_Cycles#Coincident_Indicators Coincident Indicators] within the economic cycle.
 
Please refer to the Wiki for further information on [[Economic Cycles]].

Latest revision as of 12:27, 23 November 2023

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

The Basics of 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.


Objections to Fundamental Analysis

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.


Institutional and Retail Traders

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.


Fundamental Supply and Demand

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.


Sentiment Analysis Overview from a Fundamental Perspective

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

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.


Intermaket Analysis

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

Fundamentals and Sentiment

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


Economic Data Releases

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


How the Forex Market Relates to other Markets

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

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.


Related Wikis

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