Forex Fundamentals: The Other Side Of The Coin

Many of you know from reading the Trader's Blog that we often talk about, and advocate, technical trading. Today's guest blogger, Georgia Anderson of GAFNN.com, also looks at "the other side of the coin," fundamental analysis, but she uses it in a way that is almost technical.

In this post, Georgia is going to give us her perspective on forex and fundamental analysis by way of an input-output matrix.
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Technical analysis or predicting the market by looking through the previous history a currency pair is a very useful and indispensable tool that every forex trader uses, however, fundamental analysis, like its name suggests, is more fundamental in nature, and tries to see what drives the forex market in the first place.

There are thousands of market drivers that move and influence the forex market and this fundamental data can be used in a very technical way. One way to take care of these is through the approach of an input-output matrix. This matrix contains information about the factor and its influence. In simple terms, the cause and effect due to one particular factor is captured as numbers in a matrix. By doing this for all the important factors, one can get an input-output matrix that well describes the future potential market movements.

The input-output matrix approach is used by many companies and advanced traders and is a closely guarded secret. It can make paupers billionaires and is thus a really powerful tool in the right hands. Many of the individuals or corporations that actually make regular profits through forex market have their own input-output matrix defined.

The numbers in this matrix are determined through a complex analysis of the past and anticipation of the future. In many cases, the data obtained is through special case studies of currency pairs through historic times and studying how the market behaves under special criteria.
As a simple demonstration of this fact, consider the beginning of the economic crisis, when many large US banks started failing. It was thus natural for a forex trader to sell off the USD he holds because the US economy is really weak.

However, the reality was quite different. The financial crisis that started in the US engulfed the whole world within no time. At this stage, the USD being the reserve currency for trade in the world, governments and multinational corporations began to accumulate USD to tide over the crisis. This caused a rapid expansion in demand for the USD, which caused it to rise above most other currencies like EUR or GBP.

The really smart traders who had the foresight could anticipate this through the effect of globalization on the forex market. This was captured through the rightly represented input-output matrix. The way to create this success is by looking at the past. The Great Depression provides the best clue of what happens during a sudden economic recession. Thus not everyone lost money in the recession – people who were smart and recognized the fundamentals of the forex market soon made a lot of money.
Of course even after the right matrix has been built, it is up to the trader to decide which factors will dominate the current economic and geopolitical scenarios. At times it might seem far-fetched to the untrained eye, but the people who really make money are the ones that are prepared for the most uncommonly occurring events.

For example, most advanced traders in the world today have a strategy in place if Israel attacks Iran. This is probably a very unlikely event, but it in the rare case it happens, it can shift the whole economic scenario in ways that the charts can never capture, simply because such events are unprecedented in history.

The real success of a trader using fundamental analysis lies in his ability to convert the abstract and unpredictable into numbers. Thus to maintain a matrix which includes the growth rate of China is a simple task because you can simply measure its GDP growth in terms of numbers. However, to assign weights to the fear that traders and governments will experience in case of a relapse of the recession is what distinguishes a success story from a good try. The trader thus needs to be well aware of the world around.

You should also understand the most important factor that moves not just the forex market but all financial markets of the world, namely, human psychology. Generations of traders have tried in vain to predict it with certainty, but it is this unpredictability that makes us human. Thus one needs to understand the way market reacts to news and information, especially the knee-jerk reactions.
As a guide, here are the 5 most important factors that you need to consider while looking at the financial situation of the world.

• Interest rates
• Trade balance, deficit and surplus
• GDP
• Employment scenario
• Housing scenario

Different people might have different importance levels attached to these factors.
Apart from the currencies themselves, it is important to make note of the growth and progress of other commodities, chiefly oil, gold and agricultural goods. These have a profound effect on the movement of the forex market. In addition, many forex traders simultaneously trade in commodities too.

Industrial metals are another segment to watch out for. Copper for example, has very huge fluctuations in price when the industrial output fluctuates. This is because copper is extensively used in a number of industries, and when the economy is doing well, it is quite likely that the copper prices will shoot up.

When financial security is threatened, as was the case in the current recession in the West, investors look for safe havens, like gold. This explains the rapid increase in gold prices and it touching the all time record high prices. This is only the psychology of the common investors that the very best and advanced traders make use of.

The forex market is full of surprises and it can humble even the most arrogant and overconfident investor. However, with experience and a thorough understanding of what lies behind the numbers and charts, an investor can see the real picture, the real drives of the market and thus predict the direction the forex market takes much before it is visible on the charts. This gives the investor with fundamental analysis a head-start of several days, which is like eons in the forex world.

Georgia Anderson
Georgia Anderson Financial News Network

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Georgia Anderson's Financial News Network - GAFNN - is the creation of Georgia Anderson, an Italian law school graduate who relocated to the US to enter into the financial world as a Futures and Forex Broker. During that experience she learned how traders need to share ideas and network together. Based on the needs of these professionals, she decided to create this website and start her own company.

The GAFNN Social Network - a "facebook" like part of the website including a blog, where users interact, share ideas, concepts and general discussions.