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October 27, 2021

Fundamental analysis: make money on news, statistics, and events.

How to use fundamental analysis in trading. Let's consider the basic strategies and give recommendations for novice traders in this article.

Fundamental analysis: make money on news, statistics, and events.

Observing how technical strategies stop working, pending and stop orders are closed after the publication of important economic news, statistics, and speeches by the heads of central banks, a novice trader may decide that the indicators are useless and need to trade according to fundamental analysis. It will be wrong, in any business you need to maintain a balance. Especially when trading the news.

Let's start with the terms. So, Fundamental Analysis - trading strategies in the foreign exchange and stock markets based on macroeconomic, geopolitical, and natural factors, statistics, actions of Central Banks and state regulators. 

The goals of fundamental analysis

If we do not take speculative trading, when we get the main profit on the first impulse after the publication of the event, then the main goal will be to forecast the fair (current and future) price of the selected asset (or group of assets) and build an approximate dynamics of its achievement.

If the current price deviates from the estimated fair market price, then the asset is considered overvalued or undervalued (depending on the forecast) - this means that the market must move towards reaching the calculated level. There are two types of influence of fundamental analysis:

  • Long-term: when a certain "set" of fundamental factors will determine the state of the global or individual national economy for a period from 3-6 months to several years. The result of this forecast is used for long-term positions.
  • Short-term: the information affects the market in the short term from a few minutes to hours, after which the asset returns to its original levels. Although there may be local reversals from several days to a week.

It is important to remember that any information is always relative. The fundamental analysis goes from global macroeconomic parameters to individual countries, regions and industries. At the lowest level, there will be individual companies, assets, shares.

Top fundamental news and statistics

Fundamental analysis is based on regularly published macroeconomic indicators and statistics from leading countries. In addition to the US and EU countries, we look at the UK, Canada, the Pacific region (Japan, Australia, and New Zealand). In addition, Asia should be controlled, especially China, Hong Kong, and Singapore.

In the economic calendar, you can see a lot of news and statistics of varying degrees of importance every day. We look only at the main fundamental events in any country:

  • Gross Domestic Product (GDP). Is a macroeconomic indicator that represents the monetary volume of the market value of all goods and services produced over a certain period (month, quarter, and year). The growth of GDP strengthens the national currency, the fall is weakening;
  • Unemployment rate. The number of unemployed as a percentage of the labor force for a certain period time. It depends on the general state of the economy. Statistics for the USA gives the strongest reaction to the Forex market.
  • Consumer Price Index (CPI). The strongest (by market reaction) price index showing the change in the average level of prices for goods and services (consumer basket) for a certain period in the economy. The growth of the index indicates an improvement in the standard of living and the economy;
  • Inflation. Rising inflation leads to a weakening of the national currency;
  • Central Bank discount rate is one of the main parameters of the situation in the financial system. The increase in rates leads to the strengthening of the national currency.

In addition to key economic indicators, look at regional news and statistics such as the DAX (Germany's main stock index) or the Canadian manufacturing PMI. Once again, the purpose of this article is to show the news trading process, rather than describe them in detail.

Economic calendar: choosing strong news and statistics

You can watch news and statistics on official websites, but it is better and faster to use calendars for publishing economic (fundamental) events. They can be either add-ons to trading terminals or as separate sites and widgets.

Here is an example of setting up a calendar. The settings are similar for all calendars, this is just an example. Look for the necessary parameters in your versions of sites and terminal extensions.

Important: Combine trading time and lifestyle. Example: If a trader lives in the European region, and options open on news from Asia, you will have to trade at night. It's not for everyone.

Let's move on to setting up the economic calendar. Again, this is an ad-free example. First, we set up the GMT (UTC) time zone, which should be the same as in the FOREX trading terminal:

Next, we select the countries in which we will trade fundamental events. Major events in all economic calendars (see an example):

Newbies should only choose the “strongest” news. Such events give good reactions and new trends, preliminary values are usually confirmed, the probability of a forecast based on statistics is higher than on “medium” and “weak” news. The final view of the calendar after the settings:

News trading strategies

Most trading strategies for news work on pending orders - an order to the broker to open a deal after the price reaches a given level. We use two of them:

  • Buy Stop. It is set above the current price. Forecast – the price will reach the level, an order will open, the uptrend will continue.
  • Sell Stop. Reverse conditions: the price goes down to the calculated level. The downtrend continues.

In each of the FOREX orders, two additional levels are set:

  • Take Profit (TP). The profit level at which the trade is automatically closed in profit.
  • Stop Loss (SL). Reverse conditions: the current transaction is automatically closed when the loss on the transaction reaches the specified level. Without SL, a loss can take away the entire trading deposit!

Approximately 10-15 minutes before the publication of the news, pending Buy Stop and Sell Stop orders are placed at the estimated distance from the current quote. Additionally, we must set Take Profit and Stop Loss, which need to be controlled, and if you need to move the price before the publication. After the publication, we wait for the price impulse to open one of the orders, close the second.

Example: profitable pending BUY trade on GBP / USD after the publication of NFP data in September 2021.

The main problem of the Straddle Trade strategy is to determine the correct distance from the current price at which pending orders will be opened. First, they should not be too close to avoid a "false" opening or even a "double" stop, when the big players will try to squeeze out the small ones before the news comes out. Second, if you set them too far, there may not be enough momentum for triggering and making a normal profit. We analyze at least 10-40 points in each direction, monitor the volatility. Set Trailing Stop on both positions!

The output of events and the reaction of orders are better controlled visually. But you can also use Expert Advisors that will automatically open and close a position at the right time, which is set immediately before publication.

№2. Market rumor strategy.

Purpose: analyzing preliminary announcements and rumors of future news, we make a forecast of the market reaction. Set one pending order in the direction of future movement.

Examples: Opening a deal on GDP Japan growth forecast. Such trades are always done manually without Stop Loss.

If the forecast is correct, the order is triggered, we close the deal at Taking Profit. The distance from the current price is slightly less than the average volatility of the last 5-7 days.

Important: almost always after publication, a false opposite impulse goes before the "true" direction. An order may be triggered, but before it reaches Take Profit, the price reverses and the transaction becomes unprofitable. We must trade with Stop Loss or Trailing Stop!

№3. Opening hedge positions before publication. For experienced traders only!

Purpose: the fundamental event is worked out to the maximum with the help of two opposite orders, one of which makes a profit, and the second is closed as quickly as possible.

In the strategy, pending orders are set as much as possible (looking at volatility) close to the current price. In this case, only Stop is set, and the profit level is not limited. Professionals can trade without Stop Loss, which makes it possible to earn money already in the first minutes, while the market is unstable. It is recommended to add Trailing Stop when a losing order is closed.

Important: when trading on the news, the broker may not allow you to quickly close the position in manual mode. If you close without a Stop Loss, you can often get into a "lock" when both pending orders are opened.  The price goes between them, giving a loss. In order to avoid such situations, you can use automatic advisors to close an order.

№4. The strategy on the rollback after the first" post-release" fast movement.

Purpose: we are waiting for the end of the first reaction and open up in the direction of a correction or a determined trend.

The strategy works according to the second part of the principle “buy on rumors (before the exit), sell on the market (after publication)”. It remains out of the market for 15-30 days before and after publication. You need to wait for the first market impulse - the larger it is, the stronger the next pullback should be.

The first order will be in the direction of the rollback, taking into account money management, and the next one, together with those who were late for the first reaction after the market turns in the direction of the main trend.

Examples:  switching to the M15 timeframe. On volatile news pairs, such as GBP/USD, trends and pullbacks are more visible than on M1.

Important: not every news can “surprise” the market so that it will give a good pullback. Look at the statistics, if such situations are rare, such a strategy can bring only losses.

№5. Automatic news trading – "autoclicker".

After the appropriate setting, the program automatically reacts to fundamental events and at all stages, the participation of the trader is not required - manual confirmation takes time, you can be late with the opening. The settings set the time, trading asset; transaction parameters (order type, volume, TP/SL levels, and distance from the price). After the signal about the actual publication, the data is transmitted to the terminal, and the transaction is opened.

The main problems are that when the publication deadline is postponed (it happens quite often), the transaction is opened incorrectly, and there is no reaction to rollbacks. This is logical for this type of trading because most of these programs are not connected to systems that automatically send fundamental signals, for example, as in Bloomberg trading terminals. 

Information may not be updated promptly or may be delayed even from Forex brokers. In addition, trade is carried out only on digital data, such important events as the speeches of the heads of Central Banks, the autoclicker “does not see”.

Important: this type of trading requires the support of STP or ECN accounts by the broker, high and reliable speed of communication channels with the trading server to open orders as quickly as possible at the optimal price.

The second problem for beginner traders will be that high-quality automatic news trading is not free (up to$ 200 per month for signal services). But if the settings are made correctly, you can quickly compensate for the costs and make a profit.

Recommendations about use …

  • The publication of news and statistics, even the strongest from the point of view of fundamental analysis, does not guarantee strong price impulses or a trend reversal - there may be no movement at all.
  • Make sure that trading on the news is allowed by the broker and there are appropriate technical and legal conditions for this.
  • On Monday, when a new trading week of the FOREX market opens, we check the time of news and events on which trading is planned. Despite the regularity of publications, there may be transfers for 1-2 days or hours;
  • If the Chairman of the Federal Reserve System or the European Central Bank is due to speak on the current trading day, it is recommended to use only strategies with pending orders;
  • If possible, it is recommended to close current positions by the time the news is released, even if the profit level is low. It's the same with losing trades;
  • When the first reaction to the news is unclear, we are waiting for the appearance of a directional trend. We open a deal only after the price breaks through strong support / resistance levels;
  • Carefully choose an asset: dynamics and volatility for the last 3-5 fundamental moments, average and maximum deviation after publication, which will help to correctly calculate profit and loss levels, possible force majeure and other factors.

The options for opening news transactions simultaneously on several assets are very risky, and as practice shows, they do not lead to a significant increase in income. Such strategies are not recommended for beginners!

Let's summarize. Discussions between traders about which method of analysis is better - technical or fundamental will never end. But, it is impossible to deny the importance of the ability to analyze the news background. Technical analysis only works with historical data, so it will always be lagging. Moving the market forward, the economy and the foundation will be a good source of additional profit, but only with strict discipline and proper capital management.

And further. There are enough news and statistics that analysts can use to justify any incomprehensible movement. Then arrange a "news trap" for beginners with knocking out stop losses. But if you decide to use such strategies, work completely independently: accumulate statistics, do not forget about technical analysis, and do not give in to speculation and question rumors.