I N V E S T S T A T I O N

FUNDAMENTAL
ANALYSIS
 WHAT IS
FUNDAMENTAL
ANALYSIS?
 Page 005

• Economic fundamentals cover a vast collection of information – whether in the form of economic, political, or environmental reports, data,
announcements, or events.

• Even a credit rating downgrade qualifies as fundamental data.

• Fundamental analysis is the use and study of these factors.

• It is the study of what’s going on in the world and around us, economically and financially speaking, and it tends to focus on how
macroeconomic elements (such as the growth of the economy, inflation, and unemployment) affect whatever we’re trading.
FUNDAMENTAL DATA
AND ITS MANY FORMS
Fundamental analysis involves studying economic trends and geopolitical events that might affect currency prices. In other words, it’s the
study of financial news and economic data.
The most important economic data to watch for include:

• Interest Rates
• Inflation
• GDP (Gross Domestic Product)
• Employment Data

When a piece of economic data is released, fundamental analysis provides insight into how price action “should” or may react to a certain
economic event.

Fundamental data takes shape in many different forms.

It can appear as a report released by the Fed on U.S. existing home sales. It can also exist in the possibility that the European Central Bank
will change its monetary policy.

The release of this data to the public often changes the economic landscape (or better yet, the economic mindset), creating a reaction from
investors and speculators.
• There are even instances when no specific report has been released, but the anticipation of such a report happening is another example
of fundamentals.

• Speculations of interest rate hikes can be “priced in” hours or even days before the actual interest rate statement.

• In fact, currency pairs have been known to sometimes move 100 pips just moments before major economic news, making for a
profitable time to trade for the brave.

• That’s why many forex traders are often on their toes prior to certain economic releases and you should be too!

• Generally, economic indicators make up a large portion of data used in fundamental analysis. Like a fire alarm sounding when it
detects smoke, economic indicators provide some insight into how well a country’s economy is doing.

• While it’s important to know the numerical value of an indicator, equally as important is the market’s expectation of that value.

• Understanding the resulting impact of the actual figure in relation to the forecasted figure is the most important part. These factors all
need consideration when deciding to trade.
FUNDAMENTAL ANALYSIS IS A VALUABLE
TOOL IN ESTIMATING THE FUTURE
CONDITIONS OF AN ECONOMY, BUT NOT
SO MUCH FOR PREDICTING CURRENCY
PRICE DIRECTION.
 BE
EXPERT TRADER
TRADING
COACHING

WHAT IS MONETARY
POLICY?

Monetary policy is a strategy undertaken by a government The Fed’s so-called dual mandate is to maintain stable
or central bank to influence a country’s economy or prices and to achieve maximum employment, while at the
financial system. In the U.S., the central bank, the same time having moderate long-term interest rates. It has
Federal Reserve, is in charge of setting monetary policy. a set of tools at its disposal to carry out monetary policy.
W HO IS THE FE DE RAL
R ESE RVE ?
The Federal Reserve is the central bank of the United
States. Also known as “The Fed,” it is in charge of the
country’s monetary policies. It also designs fiscal
policies with the goal of achieving a healthy economy
with low prices and maximum employment.
W HAT DOE S THE
F EDERAL RES ERVE DO?

The Federal Reserve has three main functions.

• It conducts the nation’s monetary policy

• It ensures stability of our financial markets
• It regulates financial institutions

The Federal Reserve operates under a mandate from

Congress to “promote effectively the goals of maximum
employment, stable prices, and moderate long term interest
rates".
W HAT AR E
I NT ER E ST R AT ES?
When people need to finance large purchases like a home or In return for lending people money, banks look to be repaid
a car, start a business, or pay college tuition, they often turn the principal of their loan along with interest. Thus, interest
to their bank for a loan. These loans can be short-term in is the price you pay to borrow money, and the terms of
nature, lasting just a few months, but they can also be interest set within the loan contract are called interest rates.
longer-term, like mortgages, which can have a duration of as The interest rate is usually denoted on an annual basis—it’s
many as 30 years. known as the annual percentage rate (APR).
WHY INTEREST RATES MATTER
TO FOREX TRADERS
the forex market is ruled by global interest rates.

A currency’s interest rate is probably the biggest factor in determining the perceived value of a currency.

So knowing how a country’s central bank sets its monetary policy, such as interest rate decisions, is a crucial thing to wrap your head
around.

One of the biggest influences on a central bank’s interest rate decision is price stability or “inflation”.

Inflation is a steady increase in the prices of goods and services.

Inflation is the reason why your parents or your parents’ parents paid a nickel for a soda pop in the 1920s, but now people pay twenty
times more for the same product.

It’s generally accepted that moderate inflation comes with economic growth.

However, too much inflation can harm an economy and that’s why central banks are always keeping a watchful eye on inflation-related
economic indicators, such as the CPI (Consumer Price Index) and PCE (Personal Consumption Expenditures).
 Australia
Reserve Bank of Australia (RBA)
Canada
Bank of Canada (BOC)
European Union
European Central Bank (ECB)
Japan
Bank of Japan (BOJ)
New Zealand
Reserve Bank of New Zealand (RBNZ)
Switzerland

CENTRAL Swiss National Bank (SNB)

United Kingdom
BANK Bank of England (BOE)
United States
Federal Reserve System (Fed)
In an effort to keep inflation at a comfortable level, central banks will most likely increase interest rates, resulting in lower overall growth
and slower inflation.

This occurs because setting high interest rates normally forces consumers and businesses to borrow less and save more, putting a damper
on economic activity.
Loans just become more expensive while sitting on cash becomes more attractive.
On the other hand, when interest rates are decreasing, consumers and businesses are more inclined to borrow (because banks ease lending
requirements), boosting retail and capital spending, thus helping the economy to grow.
INTEREST RATE
EXPECTATIONS
Markets are ever-changing with the anticipation of different events and situations. Interest rates do the same thing – they change – but they
definitely don’t change as often.

Most forex traders don’t spend their time focused on current interest rates because the market has already “priced” them into the currency
price.

What is more important is where interest rates are EXPECTED to go.

It’s also important to know that interest rates tend to shift in line with monetary policy, or more specifically, with the end of monetary cycles.
If rates have been going lower and lower over a period of time, it’s almost inevitable that the opposite will happen.

Rates will have to increase at some point.

And you can count on the speculators to try to figure out when that will happen and by how much.

The market will tell them; it’s the nature of the beast. A shift in expectations is a signal that a shift in speculation will start, gaining more
momentum as the interest rate change nears.

While interest rates change with the gradual shift of monetary policy, market sentiment can also change rather suddenly from just a single
report.
 The U.S. central bank uses this signal its outlook for the path of
interest rates, The Fed Dot Plot, which is published after each Fed
THE FEDERAL RESERVE’S meeting, shows the projections of the 16 members of the Federal Open

“DOT PLOT.” Market Committee (the bigwigs in the Fed who are actually are in
charge of setting interest rates).
HAWKISH VS DOVISH
We just learned that currency prices are affected a great deal by changes in a country’s interest rates.

We now know that interest rates are ultimately affected by a central bank’s view on the economy and price stability, which influence
monetary policy.

Central banks operate like most other businesses in that they have a leader, a president, or a chairman.

It’s that individual’s role to be the voice of that central bank, conveying to the market which direction monetary policy is headed. And
much like when Jeff Bezos or Warren Buffett steps to the microphone, everyone listens.

So by using the Pythagorean Theorem (where a² + b² = c²), wouldn’t it make sense to keep an eye on what those guys at the central banks
are saying?

Using the complex conjugate root theorem, the answer is yes!

Yes, it’s important to know what’s coming down the road regarding potential monetary policy changes. And lucky for you, central banks
are getting better at communicating with the market.
Whether you actually understand what they’re saying, well that’s a different story.

So, the next time Jerome Powell or Christine Lagarde are giving speeches, keep your ears open. Better yet, use the trusty Economic
Calendar to prepare yourself before the actual speech.

While the head of a central bank isn’t the only one making monetary policy decisions for a country (or region), what he or she has to say
is only not ignored, but revered like the gospel.

Not all central bank officials carry the same weight.

Central bank speeches have a way of inciting a market response, so watch for quick movement following an announcement.
Speeches can include anything from changes (increases, decreases, or holds) to current interest rates, to discussions about economic
growth measurements and outlook, to monetary policy announcements outlining current and future changes.

But don’t despair if you can’t tune into the live event. As soon as the speech or announcement hits the airwaves, news agencies from all
over make the information available to the public.
Currency analysts and traders alike take the news and try to dissect the overall tone and language of the announcement, taking special
care to do this when interest rate changes or economic growth information are involved.

Much like how the market reacts to the release of other economic reports or indicators, forex traders react more to central bank activity,
and interest rate changes when they don’t fall in line with current market expectations.

It’s getting easier to foresee how a monetary policy will develop over time, due to increasing transparency by central banks.

Yet there’s always a possibility that central bankers will change their outlook in greater or lesser magnitude than expected.

It’s during these times that market VOLATILITY is high and care should be taken with existing and new trade positions!
WHAT DOES IT MEAN TO
BE “HAWKISH”?
The term hawkish is used to describe contractionary monetary policy. Central bankers can be said to be hawkish if they talk about
tightening monetary policy by increasing interest rates or reducing the central bank’s balance sheet. A monetary policy stance is said to be
hawkish if it forecasts future interest rate increases. Central bankers can also be said to be hawkish when they are positive about the
economic growth outlook and expect inflation to increase.

Currencies tend to move the most when central bankers shift tones from dovish to hawkish or vice versa. For example, if a central banker
was recently dovish, stating that the economy still requires stimulus and then, in a later speech, stated that they have seen inflation
pressures rising and strong economic growth, you could see the currency appreciate against other currencies.

Some words that could be used describing a hawkish monetary policy include:

• Strong economic growth

• Inflation increasing
• Reducing the balance sheet
• Tightening of monetary policy
• Interest rate hikes

Generally, words used that indicate increasing inflation, higher interest rates and strong economic growth lean towards a more hawkish
monetary policy outcome.
WHAT DOES IT MEAN TO
BE “DOVISH”?
Dovish refers to the opposite. When central bankers are talking about reducing interest rates or increasing quantitative easing to stimulate
the economy they are said to be dovish. If central bankers are pessimistic about economic growth and expect inflation to decrease or
become deflation and they signal this to the market through their projections or forward guidance, they are said to be dovish about the
economy.

Some words that could be used to describe a dovish monetary policy, include:

• Weak economic growth

• Inflation decreasing/deflation (negative inflation)
• Increasing the balance sheet
• Loosening of monetary policy
• Interest rate cuts
HAWKISH VS DOVISH
EXPLAINED
 HOW TO TRADE A
HAWKISH OR DOVISH
CENTRAL BANK
A slight shift in tone from a central banker could have
drastic consequences for a currency. Traders often
monitor Federal Open Market Committee meetings and
minutes to look for slight changes in language that could
suggest further rate hikes or cuts and attempt to take
advantage of this.
Monetary policy standing as at 1 January 2019

The image above shows the different central banks current monetary policy stance. When a central banks’ monetary policy stance moves
more towards the left (dovish) their currency could depreciate against other currencies. If the monetary policy stance moves more towards
the right (hawkish) their currency could appreciate.
Trading a hawkish or dovish central bank isn’t as easy as buying a hawkish central bank currency or selling a dovish central bank
currency. It has to do with changing interest rate expectations. Let’s look at two scenarios:
Scenario 1:

If a central bank is currently in a rate hiking cycle, the market will have already forecasted future interest rate hikes. It is the job of the
trader to watch for clues and economic data that could shift the tone of the central bank to either more hawkish than currently, or to
dovish. Currencies could move a large amount when the monetary tones shift from what they are currently.

Scenario 2:

Likewise, if a central bank is currently cutting rates and economic data hasbeen negative, the market would have priced-in the current
dovish monetary stance. Traders would have to watch the central bankers forward guidance and economic data, which you can find on an
economic calendar, for clues to whether they may become more dovish than currently, or hawkish.

In late 2018 the federal reserve was quite hawkish. Federal Reserve Chairman, Jerome Powell, stated that “we’re a long way away from
neutral at this point” which the market perceived as hawkish (2 Oct 2018). This implied that the Federal Reserve still had to hike rates
many more times to get to the neutral rate. Then on the 28th of November, the FOMC released their statement of monetary policy in
which Jerome Powell said he saw rates at “just below neutral”. This shift in tone is like scenario 1 above, where the central banks shifts
tone from hawkish to slightly dovish. Leading to a depreciation of the currency- see the charts below that show what happened to the
Dollar Index (DXY) on the October 2, 2018 and then on the November 28, 2018.
October 2, 2018 - Federal Reserve Chairman, Jerome Powell says “We’re a long way away from neutral at this point” leading to
appreciation of the Dollar.
15min US Dollar index chart, vertical line indicating October 2, 2018.
November 28, 2018 Federal Reserve Chairman says that interest rates are “just below neutral” indicating a shift in tone from hawkish to
dovish. Dollar depreciations.
15min USD Dollar index chart
MACROECONOMIC BASES
EMPLOYMENT: THE KEY DRIVER OF
ECONOMIC GROWTH AND
PROSPERITY
Employment is considered to be a key economic driver and is an important measure of economic growth. According to the International
Labor Organization, unemployment is defined as ‘’people of working age who are without work, available for work and actively seeking
employment.” So, thereby, those that have jobs are considered employed while those that do not have a job but are currently looking for
one are considered unemployed. Although the unemployment rate is not infallible, it is an important factor to consider when performing
fundamental analysis and can be likened to the basic economic principle of supply and demand.

Because the change in supply/demand of labor has a direct impact on both growth and consumer spending; unemployment, gross
domestic product (GDP) and Inflation are often perceived to be inter-related and all form part of the primary macroeconomic objectives
set out by policymakers. Data releases with employment statistics are some of the most important events on the economic calendar and
are followed closely by both Central Banks and market participants.
ECONOMIC IMPACT OF
UNEMPLOYMENT
For the US, the Federal Reserve Bank (“The Fed”) relies on employment data when assessing potential adjustments to monetary policy.
For example, if US unemployment rate is high, the Central Bank will look to boost the economy with expansionary monetary policy,
which often entails reducing interest rates, which can make investing in growth that much more attractive given that rates (opportunity
cost) are lower.
The knock on effect of expansionary monetary policy on economic output is demonstrated in the diagram below:
EMPLOYMENT TO INFLATION
On the other end of the spectrum, strong employment and low rates of unemployment do not necessarily spell for tighter monetary policy
or higher rates. There is another factor of concern in that equation, and that’s when inflation begins to enter into the mix.

As the unemployment rate drops, businesses will have a more difficult time finding employees. This should lead to competition for those
workers, and this will often show in the form of higher wages, which is considered as inflation.

Inflation is usually the bigger motivator for Central Bankers to hike rates and tighten policy, as this gives them reason for looking to
protect the financial system from capital erosion via negative real rates and/or runaway inflation.

In the US, this is often followed through the Non-farm Payrolls report in terms of ‘Average Hourly Earnings (AHE).’
EMPLOYMENT REPORTS: NON-
FARM PAYROLLS
The Non-Farm Payroll (NFP) report (released by the Bureau of Labor Statistics on the first Friday of every month at 08:30 EST) is one of
America’s most influential economic announcements as it is seen as a direct representation of US economic growth. NFP is widely
followed due to its early release, highlighting data for the most recently completed month and it’s often one of the first barometers that
market participants have for that period. However, the unincorporated self-employed, unpaid volunteers or employees of family, farm
workers and domestic workers are all excluded from NFP; and given the early nature of the report, it’s often subject to revisions in later
months.

The NFP report comprises data from the Current Employment Statistics (CES) program from the U.S which surveys approximately
141,000 businesses and government agencies. This represents approximately 486,000 individual work sites, with the objective of
providing detailed industry data on employment, hours, and earnings of workers on nonfarm payrolls, which accounts for 80% of the US
workforce. Workers from the manufacturing, construction and goods sectors are included in the NFP report. The release of NFP, the US
unemployment rate and Average Hourly Earnings (AHE) at the beginning of the month makes this data even more significant since it sets
the tone for markets under the watchful eye of the Federal Reserve.
 WHAT IS ECONOMIC GROWTH
AND WHY IS IT SO IMPORTANT?
Top news headlines are often dominated by the release of gross domestic product (GDP) figures and for good reason. The GDP release
attracts a lot of attention from traders and market participants because of its signaling effect and ability to move financial markets.

When news outlets or financial publications refer to ‘growth’ they generally mean gross domestic product or GDP.

GDP measures the value of goods and services produced by a country in a given year and serves as an indication of economic health of
that country. Essentially, it’s an objective measure of improving or worsening economic conditions in a particular country over time.
HOW IS GDP REPORTED?
GDP has four main readings, one per quarter, often denoted as Q1, Q2, Q3 and Q4; but you may notice that GDP figures are reported
every month. This is because GDP is a lagging economic indicator, meaning that there is a lag period before the data is collected,
analyzed and adjusted to account for seasonal influences. Lagging economic indicators are not to be confused with lagging technical
indicators.

GDP figures are mainly reported as a quarter on quarter figure (QoQ) or year on year (YoY). The below image shows the percentage
change in real GDP* (QoQ):
Real GDP provides a more accurate indication of production/output as it removes the influence of higher prices on the value of
aggregated goods and services in the economy
There are three reported figures for each quarter:

• The preliminary/advance figure

• The second estimate and
• The final GDP figure.

The preliminary/advance figure tends to have the biggest impact from a trading point of view as the other two figures generally involve
small refinements to the initial figure. The component factors that make up GDP can often be observed and aggregated ahead of the
released figure, meaning GDP is less likely to provide a shock to the market than other data releases such as Non-farm Payrolls (NFP).

However, do keep in mind that for major economies an estimated GDP growth figure that differs from the actual by 0.3 or 0.2 percentage
points can translate into billions of dollars -which may attract varying opinions of the state of the economy and result in elevated
volatility after the release.
Real GDP provides a more accurate indication of production/output as it removes the influence of higher prices on the value of
aggregated goods and services in the economy
There are three reported figures for each quarter:

• The preliminary/advance figure

• The second estimate and
• The final GDP figure.

The preliminary/advance figure tends to have the biggest impact from a trading point of view as the other two figures generally involve
small refinements to the initial figure. The component factors that make up GDP can often be observed and aggregated ahead of the
released figure, meaning GDP is less likely to provide a shock to the market than other data releases such as Non-farm Payrolls (NFP).

However, do keep in mind that for major economies an estimated GDP growth figure that differs from the actual by 0.3 or 0.2 percentage
points can translate into billions of dollars -which may attract varying opinions of the state of the economy and result in elevated
volatility after the release.
GDP GROWTH AND THE
SIGNALING EFFECT
The state of the economy is watched very closely by governments and central banks. When the economic growth (GDP) is stagnant or the
economy is technically in a recession, central bank policy shifts and becomes more ‘accommodative,’ providing liquidity and lowering
interest rates; while increased government spending often follows suit. In economic booms central bankers look to reign in overheating
economies and monetary policy becomes more ‘contractionary’ in nature - raising interest rates, while governments often reduce
spending.

Longer-term macro traders are able to analyze whether an economy is in a boom, recession or transitionary phase when planning trade set
ups. Currencies linked to central banks that are ‘hawkish’ tend to appreciate at the start of an interest rate hiking cycle; while currencies
linked to central banks that are ‘dovish’ tend to depreciate at the start of an interest rate cutting cycle.

For equities, lower future interest rates will make it easier for individuals and institutions to access credit at low rates which can be used
to invest in the stock market. Additionally, lower interest rates translate into lower discount rates applied to future company cash flows to
arrive at a higher valuation for shares in general.

Furthermore, traders are often able to pick up on clues on the direction of future monetary policy from the tone and language used by the
heads of various central banks in their press conferences. Press conferences follow after an interest rate decision has been released.
GDP: COMPONENTS OF
GROWTH
From an economic point of view, the main components of growth can be listed under the following broad categories:
• Consumption
• Investment
• Government spending
• Net exports

Output (GDP) = Consumption + Investment + Government spending + Net Exports

Consumption is the everyday exchange of money for goods and services such as buying groceries or paying your internet service
provider. Investment refers to private local investment or capital expenditure, for example businesses will reinvest in the business to
increase productivity and boost employment levels.

Governments spend money on infrastructure, equipment and salaries of government employees and this expenditure can look significant
in times when general spending and business investment decline. Net exports is the result of taking total value of exports and subtracting
the total value of imports and is the result of international trade.
 LEADING ECONOMIC
INDICATORS OF GROWTH
GDP growth is not the only indication of the state of an economy. While GDP is inherently lagging in nature traders can consider a whole
host of leading economic indicators that can provide insight into the condition of different sectors of the economy before the GDP data is
even released.
The data releases provided below also shed some light on underlying economic environment before GDP data is released:

• New building permits – This measures the change in the number of new building permits issued by the government. Building permits
are a key indicator of demand in the housing market and the housing market/construction tend to move closely with the underlying
state of the economy.
• Consumer credit - This figure has strong ties to consumer spending and confidence. Rising debt levels are usually indicative of
economic strength as banks feel comfortable issuing approving lines of credit. On the other hand consumers feel financially stable
enough to make the monthly repayments.
• Retail sales – Considered a primary gauge of consumer spending, which accounts for a sizeable portion of overall economic activity
• Consumer confidence - This measures the level of consumer confidence with respect to economic activity. It is a leading indicator as
it can predict consumer spending, which plays a major role in overall economic activity. Higher readings point to higher consumer
optimism.
• ISM Manufacturing/services PMI – Purchasing managers in any company hold the most current and relevant insight into their
company’s view of the economy and therefore their sentiment of current economic conditions are of great value. A value above 50
indicates optimism while values below 50 are viewed as pessimistic.
WHAT IS INFLATION?
Inflation is the rise in prices of goods and services in an economy over a period of time, and is often displayed in percentage form. For
example, if inflation is 2%, this suggests that prices are (on average) 2% higher than the previous period. Therefore, if a bottle of water
cost $1 last year then this year it should be around $1.02. Inflation can result in significant costs to an economy as the purchasing power
of individuals fall.
MEASURING INFLATION
Consumer Price Index (CPI)

• This is one of the more common ways of measuring inflation, calculating inflation is based on a basket of goods and services which
are often referred to as a ‘cost-of-living index’. Common cost-of-living indexes are the Consumer Price Index (CPI) and Retail Price
Index (RPI). These measures relate to inflation experienced by consumers on a daily basis. Each central bank faces unique headwinds
in selecting appropriate items to include within their inflation calculation.

Core CPI vs Headline CPI:

• Two common phrases when dealing with inflation is ‘core’ and ‘headline’ CPI. This differentiating factor between the two terms is
quite simple. Core CPI refers to the omission of food and energy prices from the Consumer Price Index while headline CPI includes
both food and energy prices.

Producer Price Index (PPI)

• The Producer Price Index (PPI) focuses on inflation at the early stages of production which can provide essential information for
manufacturers and industry. The chart below shows the historical comparison between the different inflation measures (CPI, PPI and
GDP Deflator). It is clear that PPI is the most volatile which can be explained in part by producers being unable to pass on relatable
costs to the consumer in difficult periods such as the global financial crisis.
GDP Deflator

• Another way to measure inflation is via the GDP deflator which takes into account domestic goods only while CPI and/or RPI
includes foreign goods, as well. A second key difference is that the GDP deflator method encompasses all goods and services while
CPI and/or RPI only measures the price of goods and services bought by consumers. Because the GDP deflator is not restricted by a
fixed basket of goods, it has an advantage over the others.

• GDP Deflator = (Nominal GDP/Real GDP) x 100

• Each measure has bespoke properties that may appeal to different individuals. Therefore, there is no ‘best’ way to calculate inflation
but rather each measure has unique aspects that will be suited for different requirements and applications.
ECONOMIC GROWTH AND
OUTLOOK
We start easy with the economy and outlook held by consumers, businesses, and governments.

It’s easy to understand that when consumers perceive a strong economy.

Consumers feel happy and safe, and they spend money. Companies willingly take this money and say, “Hey, we’re making money!
Wonderful! Now… uh, what do we do with all this money?”

Companies with money spend money. And all this creates some healthy tax revenue for the government.

They jump on board and also start spending money. Now everybody is spending, and this tends to have a positive effect on the economy.

Weak economies, on the other hand, are usually accompanied by consumers who aren’t spending, businesses who aren’t making any
money and aren’t spending, so the government is the only one still spending. But you get the idea.

Both positive and negative economic outlooks can have a direct effect on the currency markets.
The most commonly used measure of economic growth is GDP.
GDP stands for “Gross Domestic Product” and represents the total monetary value of all final goods and services produced (and sold)
within a country during a period of time (typically one year).

GDP provides an economic snapshot of a country, used to estimate the size of an economy and growth rate.

Here’s a visualization from HowMuch.net that shows the $86 TRILLION global economy in one chart:
CAPITAL FLOWS
Globalization, technological advances, and the internet have all contributed to the ease of investing your money virtually anywhere in the
world, regardless of where you call home.

You’re only a few clicks of the mouse away (or a phone call for you folks living in the Jurassic era of the 2000s) from investing in the
New York or London Stock exchange, trading the Nikkei or Hang Seng index, or from opening a forex account to trade U.S. dollars,
euros, yen, and even exotic currencies.

Capital flows measure the amount of money flowing into and out of a country or economy because of capital investment purchasing and
selling.
The important thing you want to keep track of is capital flow balance, which can be positive or negative.
When a country has a positive capital flow balance, foreign investments coming into the country are greater than investments heading out
of the country.

A negative capital flow balance is the direct opposite. Investments leaving the country for some foreign destinations are greater than
investments coming in.

With more investment coming into a country, demand increases for that country’s currency as foreign investors have to sell their currency
in order to buy the local currency.

This demand causes the currency to increase in value.

Simple supply and demand.

And you guessed it, if supply is high for a currency (or demand is weak), the currency tends to lose value.
When foreign investments make an about-face, and domestic investors also want to switch teams and leave, and then you have an
abundance of the local currency as everybody is selling and buying the currency of whatever foreign country or economy they’re
investing in.

Foreign capital loves nothing more than a country with high interest rates and strong economic growth. If a country also has a growing
domestic financial market, even better!
TRADE FLOWS AND TRADE
BALANCE
International trade can be broadly distinguished between trade in goods (merchandise) and services. The bulk of international trade
concerns physical goods, while services account for a much lower share.

World trade in goods has increased dramatically over the last decade, rising from about $10 trillion in 2005 to more than $18.89 trillion
in 2019.

We’re living in a global marketplace. Countries sell their own goods to countries that want them (exporting), while at the same time
buying goods they want from other countries (importing).
Have a look around your house. Most of the stuff (electronics, clothing, doggie toys) lying around is probably made outside of the
country you live in.

If you live in the United States, look at all the different countries that the U.S. trades with.
Every time you buy something, you have to give up some of your hard-earned cash.
Whoever you buy your widget from has to do the same thing.

U.S. importers exchange money with Chinese exporters when they buy goods. And Chinese imports exchange money with European
exporters when they buy goods.

All this buying and selling is accompanied by the exchange of money, which in turn changes the flow of currency into and out of a
country.

Trade balance (or balance of trade or net exports) measures the ratio of exports to imports for a given economy.
It demonstrates the demand for that country’s goods and services, and ultimately its currency as well.

If exports are higher than imports, a trade surplus exists and the trade balance is positive.

If imports are higher than exports, a trade deficit exists, and the trade balance is negative.
Every time you buy something, you have to give up some of your hard-earned cash.
Whoever you buy your widget from has to do the same thing.

U.S. importers exchange money with Chinese exporters when they buy goods. And Chinese imports exchange money with European
exporters when they buy goods.

All this buying and selling is accompanied by the exchange of money, which in turn changes the flow of currency into and out of a
country.

Trade balance (or balance of trade or net exports) measures the ratio of exports to imports for a given economy.
It demonstrates the demand for that country’s goods and services, and ultimately its currency as well.

If exports are higher than imports, a trade surplus exists and the trade balance is positive.

If imports are higher than exports, a trade deficit exists, and the trade balance is negative.
So:
 THE GOVERNMENT:
PRESENT AND FUTURE
After the Great Financial Crisis (GFC) caused the Great Recession during the late 2000s, all eyes were glaringly watching their respective
country’s governments, wondering about the financial difficulties being faced, and hoping for some sort of fiscal responsibility that
would end the woes felt in our wallets.

A decade later, we now face a similar situation as the world tries to navigate a global health crisis and economic collapse caused by the
coronavirus (COVID-19) pandemic.

Instability in the current government or changes to the current administration can have a direct bearing on that country’s economy and
even neighboring nations. And any impact on an economy will most likely affect exchange rates.
WHAT IS A CURRENCY
CROSS PAIR?
Back in the ancient days, if someone wanted to change currencies, they would first have to convert their currencies into U.S. dollars, and
only then could they convert their dollars into the currency they desired.

The U.S. dollar was known as a “vehicle currency” since the currency was used as the medium of exchange for international transactions.

For example, if a person wanted to change their U.K. sterling into Japanese yen, they would first have to convert their sterling into U.S.
dollars, and then convert these dollars into yen.

With the invention of currency crosses, individuals can now bypass the process of converting their currencies into US dollars and simply
convert it directly into their desired currency.
Some examples of crosses include GBP/JPY, EUR/JPY, EUR/CHF, and EUR/GBP.
We’re talking about really weird combinations like AUD/CHF, AUD/NZD, CAD/CHF, and GBP/CHF. That’s why we call them obscure
crosses.

Trading in these pairs can be more difficult and riskier than trading euro or yen currency crosses.

Since very few forex traders trade them, transaction volume is much lower resulting in lower liquidity.
MULTIPLE TIME FRAME
ANALYSIS
Multiple time frame analysis is simply the process of looking at the same pair and the same price but on different time frames.

Remember, a pair exists on several time frames – the daily, the hourly, the 15-minute, heck, even the 1-minute!
When you use a chart, you’ll notice that there are different time frames being provided.

There is a reason why chart apps offer so many time frames. It’s because there are different market participants in the market.

This means that different forex traders can have their different opinions on how a pair is trading and both can be completely correct.
Trades sometimes get confused when they look at the 4-hour, see that a sell signal, then they hop on the 1-hour and see price slowly
moving up.

What are you supposed to do?

A. Stick with one time frame, take the signal, and completely ignore the other time frame?
B. Flip a coin to decide whether you should buy or sell?

Both options are terrible.

So what are the benefits of looking at multiple time frames?

• They give you different perspectives and views of a currency pair.

• They enable you to spot upcoming support or resistance areas.
• They enable you to spot trend changes earlier.
• They help you to enter or exit a trade as early as possible.
• They help to confirm the trend change in a higher time frame.
• They allow you to know what other market participants are thinking.
• They enable you to see the small picture, medium picture, and the big picture.
WHAT TIME FRAME SHOULD
I TRADE?
One of the reasons newbie traders don’t do as well as they should is because they’re usually trading the wrong time frame for their
personality.

New forex traders will want to get rich quickly so they’ll start trading small time frames like the 1-minute or 5-minute charts.

Then they end up getting frustrated when they trade because the time frame doesn’t fit their personality.

For some forex traders, they feel most comfortable trading the 1-hour charts.
This time frame is longer, but not too long, and trade signals are fewer, but not too few.

Trading on this time frame helps give more time to analyze the market and not feel so rushed.

On the other hand, we have a friend who could never, ever, trade in a 1-hour time frame.
It would be way too slow for him and he’d probably think he was going to rot and die before he could get in a trade.
He prefers trading a 10-minute chart. It still gives him enough time (but not too much) to make decisions based on his trading plan.
When we first started trading, we couldn’t stick to a time frame.

We started with the 15-minute chart.

Then the 5-minute chart.

Then we tried the 1-hour chart, the daily chart, and the 4-hour chart.

This is natural for all new forex traders until you find your comfort zone and why we suggest that you DEMO trade using different time
frames to see which fits your personality the best.