Part 3 Fundamental Analysis – Announcement of NFP news

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Forex News – The Basis of Fundamental Analysis

A competent fundamental analysis is impossible without the use of news. How to trade on the news – the basic rules and features.

Among the existing traders who are actively working in all kinds of exchange markets, including the currency market, there are two fundamental approaches to the analysis of movement quotes. It technical and fundamental analysis. It can be noted that the differences between these two approaches are, we can say, fundamental and somewhere even philosophical in nature, and the extremely radical representatives of these two schools of exchange market analysis do not recognize each other, considering their direction the only true one.

Golden Forex

It so happened historically that most private traders in the vastness of our country preach mainly technical analysis, sometimes, completely rejecting the merits of a different approach. As a rule, ardent adherents of technical analysis are not interested in anything other than graphs; these people are sure that they do not need to know anything other than simple mathematics. As a rule, the very dedicated adherents of this method spend a lot of time in search of a universal “golden formula” that would work on all types of charts and on different instruments. They usually don’t study analytical reviews and do not follow economic news, they build graphs of varying complexity, piling them with all kinds of indicators and oscillators, behind which sometimes the price chart itself is not visible. At the same time, “pure” fundamentalists go to the other extreme, studying many economic factors, they try to find a fair price or a fair exchange rate, trying to calculate the underestimation or overvaluation of a particular currency, relative to another, and on the basis of this determine the prevailing trend trend.

However, as always, the truth lies in the middle, too fanatical adherents of one or another approach to exchange trading will lose sooner or later in the long run. From the experience of existing and successful traders, it is proved that both methods make sense comprehensively, given the achievements, and they are, both fundamental and technical analysis.

That’s why, given, as mentioned above, a certain bias in the environment of our domestic traders towards technical analysis, in this article I will try to explain some basic principles of fundamental analysis, in relation to the forex market, which can help not make fatal mistakes when trading in the foreign exchange market.

Basic Concepts of Forex Fundamental Analysis

So, fundamental analysis is based on macroeconomic dataoriginating from economic news. However, this news is very, very numerous, in our information age, news of a different nature pours on us like from a cornucopia on television, radio and the Internet. How to understand this informational sea and, as they say, to separate the grain from the chaff.

First of all, since we work in the foreign exchange market, we will be interested in not just news, but forex news. In this regard, it will not be more difficult to determine the most important indicators. The fact is that there is a certain periodicity of economic forex newshaving an impact on exchange rates. I will not give examples, since you can find an exit calendar on any site of a reputable Dealing Center, both domestic and foreign forex news. As a rule, this calendar is given a week in advance, and on some sites a month in advance.

What should I pay attention to first of all?

By virtue of historically fixed rules, the Jamaican currency system, the main and reference world currency is dollar. Therefore, the news on the US should pay first attention. It should further be noted that due to its specifics, the forex market operates 24 hours a day. However, it is customary to divide the daily trading session of the foreign exchange market into three main time periods, three intraday trading sessions – Asian, European and American. So the main stream of Forex news in the USA, with some exceptions, came at the beginning of the American trading session. Exchange markets in the United States begin to operate at 8 a.m., respectively, Moscow time in 16:00. Generally important calendar news forex news go out half an hour and a half hours after the start of the trading session, respectively at 16-30 and 18-00. It is at this time that peak activity in the foreign exchange market will be observed. Even for an ardent supporter of technical analysis, only one knowledge of such a pattern can give good advantages, he will simply know that at this time one should prepare for good trading.

It should also be noted once again that US news will be important. for any forex currency pair.

Further, respectively, for each major currency pair, in addition to US news, they will be important economic news of the country whose currency is paired with in dollar. For example, for the EURUSD pair, this is news on the Eurozone, and also (what you should pay attention to) this is the news of key Eurozone countries – Germany, France and Italy. In this regard, it should be noted that due to the fact that Germany, especially in recent years, has taken more and more dominant positions in the euro countries, the news regarding this country is considered even more important than the news on the Eurozone. A similar approach applies to other currency pairs GBPUSD, USDJPY, USDCHF and so on.

It should also be noted that the news release for other key pairs also follows approximately the same logic as the news release for the USA, the main block of news on the economy of these countries falls on the first two hours from the start of the trading session in these countries. By time, you should focus on: New York time according to news from the USA, on London pound sterling, Frankfurt to Euro, Tokyo to Japanese Yen.

As a result, even a superficial acquaintance by a trader using technical analysis with the basics of fundamental analysis gives visible advantages, not excluding the own “technical” method. Forex Economic News regularly appear on a clear schedule, knowing this “techie” will be ready for bursts of market activity during the hours of the release of a particular news. However, it is worth noting that this is only the first step in mastering the “foundation”, a deeper study of this analysis method gives even greater advantages in trading. How to use it, and how to better understand the events occurring in the market, which makes trading a meaningful process, will be described in subsequent articles on this topic.

Part 3: Fundamental Analysis – Announcement of NFP news

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Fundamental, Technical and Sentiment Analysis

In order to maximise gains and reduce losses, traders typically turn to fundamental, technical and sentiment analysis. While fundamental analysis tells traders about intrinsic market values, technical analysis relies on past performance of a financial instrument. The third branch, sentiment analysis, is used to determine the general attitude of traders, which shapes the overall market mood, within a specific timeframe.

Of course, there’s no absolute way to tell which way the markets will go – and due to high volatility, losses are always a possibility. But, it helps to do your research.

Fundamental Analysis

When it comes to forex trading, fundamental analysis is all about examining factors that could have an effect on currency prices. A lot depends on the central bank of each country and the expected interest rates released by them. Interest rate hikes could increase the value of a currency over the long-term. Other factors, such as GDP, inflation rate, production growth, NFP releases, and so on hold importance for commodity traders as well. The aim is to identify which economy is booming and which isn’t. The day-to-day news releases are important for fundamental traders.

Technical Analysis

Technical analysts believe that what happened in the past will influence future market movements. Forex traders rely heavily on trend and chart analysis to figure out potential price actions. Forex, being a 24-hour market, provides a huge volume of data for technical traders, who then use it to predict future activity.

Support and resistance levels are used to determine whether to buy or sell a currency. The charts usually represent historical price movements, visually. The movements on the charts, created by price actions, provide clues about the supply and demand levels of specific currencies. There are other indicators, such as oscillators, volume and trend indicators, which help in identifying price trends.

However, many traders believe that indicators do not give foolproof answers, unless combined with market fundamentals. There is no guarantee that past performance will have an effect on future results.

Sentiment Analysis

The market is not only driven by fundamentals, but also short-term sentiments, which makes currencies volatile on a day-to-day basis. It is often seen that despite long-term fundamentals showing an uptrend, a currency remains down, due to an overall ‘bad mood.’ This bad mood means that the vast majority of traders are committed to a down position, due to some reason. Such sentiments often help traders assume a particular position.

Sentiment analysts are often referred to as contrarians. These traders invest against the majority view of the market, since they believe that the markets always tend to move against the existing sentiment, sooner or later.

Sentiment trading by itself is quite risky, since it involves uninformed trades. Uninformed traders may be moving the market prices away from fundamental values. However, used in combination with other forms of analysis, it can help in getting a clearer picture.

All three approaches are important. The best approach will be based on your risk tolerance, time restrictions and goals.

Fundamental Analysis

What Is Fundamental Analysis?

Fundamental analysis (FA) is a method of measuring a security’s intrinsic value by examining related economic and financial factors. Fundamental analysts study anything that can affect the security’s value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company’s management.

The end goal is to arrive at a number that an investor can compare with a security’s current price in order to see whether the security is undervalued or overvalued.

This method of stock analysis is considered to be in contrast to technical analysis, which forecasts the direction of prices through an analysis of historical market data such as price and volume.

Key Takeaways

  • Fundamental analysis is a method of determining a stock’s real or “fair market” value.
  • Fundamental analysts search for stocks that are currently trading at prices that are higher or lower than their real value.
  • If the fair market value is higher than the market price, the stock is deemed to be undervalued and a buy recommendation is given.
  • In contrast, technical analysts ignore the fundamentals in favor of studying the historical price trends of the stock.

Understanding Fundamental Vs. Technical Analysis

Understanding Fundamental Analysis

All stock analysis tries to determine whether a security is correctly valued within the broader market. Fundamental analysis is usually done from a macro to micro perspective in order to identify securities that are not correctly priced by the market.

Analysts typically study, in order, the overall state of the economy and then the strength of the specific industry before concentrating on individual company performance to arrive at a fair market value for the stock.

Fundamental analysis uses public data to evaluate the value of a stock or any other type of security. For example, an investor can perform fundamental analysis on a bond’s value by looking at economic factors such as interest rates and the overall state of the economy, then
studying information about the bond issuer, such as potential changes in its credit rating.

For stocks, fundamental analysis uses revenues, earnings, future growth, return on equity,
profit margins, and other data to determine a company’s underlying value and potential for future growth. All of this data is available in a company’s financial statements (more on that below).

Fundamental analysis is used most often for stocks, but it is useful for evaluating any security, from a bond to a derivative. If you consider the fundamentals, from the broader economy to the company details, you are doing fundamental analysis.

Investing and Fundamental Analysis

An analyst uses works to create a model for determining the estimated value of a company’s share price based on publicly available data. This value is only an estimate, the analyst’s educated opinion, of what the company’s share price should be worth compared to the currently trading market price. Some analysts may refer to their estimated price as the company’s intrinsic value.

If an analyst calculates that the stock’s value should be significantly higher than the stock’s current market price, they may publish a buy or overweight rating for the stock. This acts as a recommendation to investors who follow that analyst. If the analyst calculates a lower intrinsic value than the current market price, the stock is considered overvalued and a sell or underweight recommendation is issued.

Investors who follow these recommendations will expect that they can buy stocks with favorable recommendations because such stocks should have a higher probability of rising over time. Likewise stocks with unfavorable ratings are expected to have a higher probability of falling in price. Such stocks are candidates for being removed from existing portfolios or added as “short positions.

This method of stock analysis is considered to be the opposite of technical analysis, which forecasts the direction of prices through an analysis of historical market data such as price and volume.

Quantitative and Qualitative Fundamental Analysis

The problem with defining the word fundamentals is that it can cover anything related to the economic well-being of a company. They obviously include numbers like revenue and profit, but they can also include anything from a company’s market share to the quality of its management.

The various fundamental factors can be grouped into two categories: quantitative and qualitative. The financial meaning of these terms isn’t much different from their standard definitions. Here is how a dictionary defines the terms:

  • Quantitative – capable of being measured or expressed in numerical terms.
  • Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity.

In this context, quantitative fundamentals are hard numbers. They are the measurable characteristics of a business. That’s why the biggest source of quantitative data is financial statements. Revenue, profit, assets, and more can be measured with great precision.

The qualitative fundamentals are less tangible. They might include the quality of a company’s key executives, its brand-name recognition, patents, and proprietary technology.

Neither qualitative nor quantitative analysis is inherently better. Many analysts consider them together.

Qualitative Fundamentals to Consider

There are four key fundamentals that analysts always consider when regarding a company. All are qualitative rather than quantitative. They include:

  • The business model: What exactly does the company do? This isn’t as straightforward as it seems. If a company’s business model is based on selling fast-food chicken, is it making its money that way? Or is it just coasting on royalty and franchise fees?
  • Competitive advantage: A company’s long-term success is driven largely by its ability to maintain a competitive advantage—and keep it. Powerful competitive advantages, such as Coca Cola’s brand name and Microsoft’s domination of the personal computer operating system, create a moat around a business allowing it to keep competitors at bay and enjoy growth and profits. When a company can achieve a competitive advantage, its shareholders can be well rewarded for decades.
  • Management: Some believe that management is the most important criterion for investing in a company. It makes sense: Even the best business model is doomed if the leaders of the company fail to properly execute the plan. While it’s hard for retail investors to meet and truly evaluate managers, you can look at the corporate website and check the resumes of the top brass and the board members. How well did they perform in prior jobs? Have they been unloading a lot of their stock shares lately?
  • Corporate Governance: Corporate governance describes the policies in place within an organization denoting the relationships and responsibilities between management, directors and stakeholders. These policies are defined and determined in the company charter and its bylaws, along with corporate laws and regulations. You want to do business with a company that is run ethically, fairly, transparently, and efficiently. Particularly note whether management respects shareholder rights and shareholder interests. Make sure their communications to shareholders are transparent, clear and understandable. If you don’t get it, it’s probably because they don’t want you to.

It’s also important to consider a company’s industry: customer base, market share among firms, industry-wide growth, competition, regulation, and business cycles. Learning about how the industry works will give an investor a deeper understanding of a company’s financial health.

Quantitative Fundamentals to Consider

Financial statements are the medium by which a company discloses information concerning its financial performance. Followers of fundamental analysis use quantitative information gleaned from financial statements to make investment decisions. The three most important financial statements are income statements, balance sheets, and cash flow statements.

The Balance Sheet

The balance sheet represents a record of a company’s assets, liabilities and equity at a particular point in time. The balance sheet is named by the fact that a business’s financial structure balances in the following manner:

Assets = Liabilities + Shareholders\’ Equity

Assets represent the resources that the business owns or controls at a given point in time. This includes items such as cash, inventory, machinery and buildings. The other side of the equation represents the total value of the financing the company has used to acquire those assets. Financing comes as a result of liabilities or equity. Liabilities represent debt (which of course must be paid back), while equity represents the total value of money that the owners have contributed to the business – including retained earnings, which is the profit made in previous years.

The Income Statement

While the balance sheet takes a snapshot approach in examining a business, the income statement measures a company’s performance over a specific time frame. Technically, you could have a balance sheet for a month or even a day, but you’ll only see public companies report quarterly and annually.

The income statement presents information about revenues, expenses and profit that was generated as a result of the business’ operations for that period.

Statement of Cash Flows

The statement of cash flows represents a record of a business’ cash inflows and outflows over a period of time. Typically, a statement of cash flows focuses on the following cash-related activities:

  • Cash from investing (CFI): Cash used for investing in assets, as well as the proceeds from the sale of other businesses, equipment or long-term assets
  • Cash from financing (CFF): Cash paid or received from the issuing and borrowing of funds
  • Operating Cash Flow (OCF): Cash generated from day-to-day business operations

The cash flow statement is important because it’s very difficult for a business to manipulate its cash situation. There is plenty that aggressive accountants can do to manipulate earnings, but it’s tough to fake cash in the bank. For this reason, some investors use the cash flow statement as a more conservative measure of a company’s performance.

The Concept of Intrinsic Value

One of the primary assumptions of fundamental analysis is that the currently price from the stock market often does not fully reflect a value of the company supported by the publicly available data. A second assumption is that the value reflected from the company’s fundamental data is more likely to be closer to a true value of the stock.

Analysts often refer to this hypothetical true value as the intrinsic value. However, it should be noted that this usage of the phrase intrinsic value means something different in stock valuation than what it means in other contexts such as options trading. Option pricing uses a standard calculation for intrinsic value, however analysts use a various complex models to arrive at their intrinsic value for a stock. There is not a single, generally accepted formula for arriving at the intrinsic value of a stock.

For example, say that a company’s stock was trading at $20, and after extensive research on the company, an analyst determines that it ought to be worth $24. Another analyst does equal research but determines that it ought to be worth $26. Many investors will consider the average of such estimates and assume that intrinsic value of the stock may be near $25. Often investors consider these estimates highly relevant information because they want to buy stocks that are trading at prices significantly below these intrinsic values.

This leads to a third major assumption of fundamental analysis: In the long run, the stock market will reflect the fundamentals. The problem is, nobody knows how long “the long run” really is. It could be days or years.

This is what fundamental analysis is all about. By focusing on a particular business, an investor can estimate the intrinsic value of a firm and find opportunities to buy at a discount. The investment will pay off when the market catches up to the fundamentals.

One of the most famous and successful fundamental analysts is the so-called “Oracle of Omaha,” Warren Buffett, who champions the technique in picking stocks.

Criticisms of Fundamental Analysis

The biggest criticisms of fundamental analysis come primarily from two groups: proponents of technical analysis and believers of the efficient market hypothesis.

Technical Analysis

Technical analysis is the other primary form of security analysis. Put simply, technical analysts base their investments (or, more precisely, their trades) solely on the price and volume movements of stocks. Using charts and other tools, they trade on momentum and ignore the fundamentals.

One of the basic tenets of technical analysis is that the market discounts everything. All news about a company is already priced into the stock. Therefore, the stock’s price movements give more insight than the underlying fundamentals of the business itself.

The Efficient Market Hypothesis

Followers of the efficient market hypothesis, however, are usually in disagreement with both fundamental and technical analysts.

The efficient market hypothesis contends that it is essentially impossible to beat the market through either fundamental or technical analysis. Since the market efficiently prices all stocks on an ongoing basis, any opportunities for excess returns are almost immediately whittled away by the market’s many participants, making it impossible for anyone to meaningfully outperform the market over the long term.

Examples of Fundamental Analysis

Take the Coca-Cola Company, for example. When examining its stock, an analyst must look at the stock’s annual dividend payout, earnings per share, P/E ratio, and many other quantitative factors. However, no analysis of Coca-Cola is complete without taking into account its brand recognition. Anybody can start a company that sells sugar and water, but few companies are known to billions of people. It’s tough to put a finger on exactly what the Coke brand is worth, but you can be sure that it’s an essential ingredient contributing to the company’s ongoing success.

Even the market as a whole can be evaluated using fundamental analysis. For example, analysts looked at fundamental indicators of the S&P 500 from July 4 to July 8, 2020. During this time, the S&P rose to 2129.90 after the release of a positive jobs’ report in the United States. In fact, the market just missed a new record high, coming in just under the May 2020 high of 2132.80. The economic surprise of an additional 287,000 jobs for the month of June specifically increased the value of the stock market on July 8, 2020.

However, there are differing views on the market’s true value. Some analysts believe the economy is heading for a bear market, while other analysts believe it will continue as a bull market.

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