Elements Of Fundamental Analysis – 3

In this concluding piece on fundamental analysis, we will look at the elements of an actual trade.

Fundamental Analysis: What, When and How to Trade

The news releases that constitute “what to trade” in fundamental analysis are all contained in a calendar format for a full year. This is known as the Economic News Calendar. The Economic Calendar is found on many broker websites as well as the sites of third-party forex support services. The following are the component parts of an economic calendar. Some of the finer details may or may not be included, depending on the source of the calendar. A news calendar (courtesy of fxstreet.com) is shown here:

a) The time of release. Always make sure you know what the release time is in your local time so you do not mix up schedules. News releases are commonly listed in EST (East Coast time, which is 5 hours behind GMT when Daylight Savings Time is off and 4 hours behind GMT when Daylight Savings Time is on). Some websites will allow traders to set the time according to their local times.

b) The news item.

c) A volatility indicator to show whether the news item has low market impact (green tag), medium market impact (yellow tag) or high market impact (red tag). High market impact news items are what the trader should be looking at as these are the news that create the greatest market volatility.

d) Consensus number: This is the number derived from a consensus of opinion poll results from economists .

e) Actual number: This area is usually blank before the news is released. Do not look for the actual number on the news calendar; it would be too late to use for news trading by the time it shows up here. Rather, look it up on your news feed to use it for trading.

f) Previous number: This is the last actual figure for the news release in question.

g) Revision: Sometimes, previous releases have to be updated to reflect capture of new data regarding that release. It is important because a revision can make the latest release look better or worse than it ordinarily would have been, and this will influence market volatility.

Another number which is not really part of the calendar but which decides if the news release is tradable or not is the deviation. Deviation is a measure of how close or far apart the actual release is from the consensus. The farther apart both numbers are from each other, the greater the volatility and the more opportunity there is to make money from trading this news item. Positive deviation is bullish, negative deviation is bearish. There is a threshold to every deviation, and this threshold is derived from the difference between the previous number and the consensus number.

If this threshold is exceeded, the news item is tradable. If it is not, then we will see a choppy, range-bound reaction to the news with plenty of whipsaws, the kind that chops up the accounts of traders who jump into the market without knowing what they are doing.

Illustration of a News Trade

We will examine the NFP trade for April 6th, 2012. Here are aspects to this trade that warrant close examination.

a) The consensus number was that 203,000 jobs would be created (+203K).

b) There was a revision to the previous number from 227K to 240K. This increased deviation threshold (240 -203 = 37).

c) Deviation threshold stood at 37K. This meant that we needed the actual number to be greater than, or less than consensus by at least 37,000 jobs to create a tradable signal. So >240K = buy USDJPY (currency pair of choice for trading the NFP) and <166K = sell USDJPY

d) Actual eventually came out at 154K, which was below our sell threshold of 166K. This was a clear sell signal, and traders immediately sold the USDJPY and it spiked downwards for 120 pips. See the chart below:

e) Price retraced to 50% Fibonacci level before continuing the downward move into Monday April 9, 2012 as seen below.

Trading the news is not rocket science if you know what you are doing. It will however take practice to master the techniques involved.

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