Most Popular Ways To Monitor Core Fundamental capital market Forces.

The contrast between technical and fundamental analysis. 

Technical analysis is static, and focuses on mapping price action. All the resulting analysis exists in a two-dimensional space along an X axis of time, and a Y axis of price. Technical traders are therefore chartists. They are the equivalent of radiologists who diagnose the structure of the body and detect patterns that point to disease or a breakdown. In contrast, fundamental traders are, in a sense, psychiatrists, and perhaps cosmologists; they diagnose the causation and the forces behind price behavior. Of course, the fundamental forces are inter-market and outside of the two dimensions of a price chart. In a sense, fundamental forces are the third dimension that deserve trader attention in trading currency pairs. While we cannot see fundamental forces, like gravity and electricity, we know they exist and shape our world.

Fundamental forces are also analogous to the seasons of the weather. Weather is caused by several factors, such as the spin of the Earth, the Moon and tides, uneven heating of the planet, and interaction of different atmospheric pressures. The results are experienced as weather. It is a very dynamic process. Deep in winter, a warm day can occur, but it is an outlier event. It can snow in July in Disney World in Orlando, but do not bet on it (the last time it snowed in Disney World was in 2009). Fundamental forces are the weather on Planet Forex! In another, deeper sense, forex prediction is similar to weather prediction. Take the case of forecasts on hurricanes. Science has not been able to precisely predict when a hurricane will form. It can detect a hurricane pattern, however, once it is formed, and then estimate a probable path. 

The limiting factor in weather prediction is known as the Lorenz Butterfly. Basically, the concept states that if you miss the flapping of a butterfly’s wing in your calculations, you will have an error in the forecast that can lead to a large error in accuracy. This phenomenon points to the condition known as irreducible complexity. When applied to forex trading, we simply do not know all of the variables that impact the price action, and therefore forecasting price direction is subject to great deal of error. Yet, we can reduce the uncertainty by understanding the core fundamental forces.

The Set of Core Fundamental Forces

How shall we think about fundamentals from the perspective of using fundamentals for trading forex? Let us get right to it. There are many variables that can be considered to be part of fundamentals. Almost too many to count. Which fundamental forces should be detected, and which could be ignored? The answer is simple: The most important fundamental forces for traders are those that result in a shift in bullish or bearish expectations. Let us categorize the different bullish and bearish forces.

Forces of Growth

Growth in an economy is an important bullish force. Anything that contributes to the expectations of continued growth acts to strengthen a currency because a stronger economy attracts capital from outside to buy the exported products of that economy. Expectations of a stronger economy also encourages consumer spending. Expectations of growth spurs increased employment. 

Forces of Decline

An economy slowing down, or expected to slow down, generates a bearish force. When unemployment increases, when inflation gets high, there is a slowdown in actual or projected spending. Some bearish forces are very latent. For example, the aging of the population generates a future slowdown in spending. Japan faces this problem more than any other country. But demographic forces are very slow moving. Additionally, technological innovation is a major deflationary force as it suppresses prices. Tomorrow’s big flat-screen television will be much less costly than today’s. Why not wait to buy it next year? Disruptive technologies and companies such as Amazon and Uber have great success while undermining established sectors. The result is economic uncertaincy generating market anxiety.

Expectations on Interest Rate Direction

Virtually anything that contributes to expectations of the economic weather changing becomes important because this leads to expectations about interest rate changes. Changes in labor market conditions, including employment, wage price growth, consumer spending, saving rates, and inflation, are force factors that directly strength or weaken bullish or bearish expectations. But to shape our trades we have to get more granular. We have to ask: expectations about what ? It is mostly expectations about whether the central banks will increase, decrease, or continue monetary policies. Since the key tool used by central banks is adjusting interest rates, trading fundamentals becomes trading expectations on interest rate changes! All currency prices ultimately reflect expectations about the direction of interest rates.

Forces of Fear

Fear of trade wars, asset bubbles, market corrections, crashes, terrorism, and global slowdowns, all comprise a set of fears that push and pull as fundamental forces on the currency pairs. They are important because they impact the day-to-day, and sometimes, hour-by-hour, market emotions. The trader is advised to be aware of which fears are dominating the news. It is also important to discern which currencies may gain or lose strength in response to the fears. For example, the Canadian, Australian, and Mexican currencies will be sensitive to fears of trade wars. Of course, the US Dollar will be a focus of such fears as well.