1FUNDAMENTAL ANALYSIS

Fundamental analysis is a series of methods for predicting future price levels that are based on an assessment of micro and macroeconomic indicators. This is an assessment of the economic policy, company reporting, market indicators, and economic forecasts for a given period. The fundamental analysis also takes into account news about monetary and financial events in the world, the phenomena of the political and economic life of individual countries, regions, and unions of countries. The analysis of the situation is carried out on how a particular event affects the development of the financial market, and what change in rates it can lead to. The fundamental analysis is effective for long-term and medium-term price forecasting.

Fundamental analysis theory states that if the current price is below or above the fair market price, then the instrument is considered overpriced or undervalued and the market is expected to move in the direction of the fair price in the future.
Traders analyze the current level of the country’s economy based on the results of studies of macroeconomic indicators:

• – Level of interest rates;
• – Indicators of economic growth (GDP, industrial production, etc.);
• – Consumer price index, spending indicators;
• – Inflation rate and inflation expectations;
• – Indicators of the employment level of the population;
• – Retail turnover and consumer confidence;
• – The state of the trade balance, the degree of dependence on external sources of raw materials;
• – Financial and monetary policy of the government.

The Importance of Macroeconomic Indicators in Fundamental Analysis

Macroeconomic indicators are statistical data that reflect the current state of the country’s economic sector and each of its areas, such as the labor market, industry, service market, trade, etc. Reports on these indicators are regularly published at certain periods by government bodies and private research companies.

Financial analysts compile an economic calendar of critical announcements and events that, if used correctly, can be valuable sources of information for traders everywhere.

The macroeconomic data enable traders to see a more complete and up-to-date picture of the country’s economy.
At the same time, such data do not guarantee the movement of the market in a certain direction. It is important to take into account that after the publication of reports on the economic and political situation, market volatility may still take place. The degree of volatility depends on the value of the indicator. Therefore, it is important for traders to understand the value of a certain indicator and how a particular indicator affects the economy as a whole.

Interest rate level

Interest rates have the biggest impact on price changes in the foreign exchange market. Central banks that set interest rates are the most powerful actors in the process. Interest rates drive investment flows. The difference in interest rates of different currencies affects the value of currencies relative to each other. Changes in interest rates lead to movement and volatility in the forex market.

Inflation

Inflation has a strong impact on the exchange rate in the long run. Inflation is a general increase in the cost of goods and services in the economy.

Inflation devalues the currency, so the currency of a country with a high inflation rate will depreciate in the long run compared to the currency of a country with a lower inflation rate. In the short term, the influence of the CPI inflation index can have the opposite effect: if inflation rises, then the Central Bank raises the refinancing rate, which has a positive effect on the national currency.

Gross domestic product (GDP)

The GDP indicator shows the total value of goods and services produced in a country in a given year. Since GDP data is published for the past period, traders analyze preliminary reports that are published several months before the presentation of the official annual report. These are The Advance Report and the Preliminary Report. Significant differences between these documents may lead to volatility.

CONSUMER PRICE INDEX (CPI)

CPI is a key indicator of the inflation rate in the economy. This indicator reflects the ratio between the price of a standard basket of goods and services and the price of the same basket in the previous period. The inflation rate is directly related to the purchasing power of the currency and its position in the international market.

When the country’s economy develops and the CPI rises, this can become an impetus for an increase in the level of interest rates, which in turn increases the attractiveness of the currency.

Employment indicators

These indicators characterize the number of jobs and the employed population of the country, they are extremely important in accurately determining the unemployment rate.

The growth in the employment rate allows us to speak with confidence about the growth of the country’s economy. And this, in turn, predicts positive changes in the value of the national currency. Employment indicators affect the quotes of national currencies since the creation of new jobs leads to an increase in employment and the growth of the market as a whole. There is an increase in GDP, at least in the short term.

Retail turnover

The indicator of retail turnover shows the total amount of sales revenue by trade organizations to the population, as well as small-scale retailing to various organizations. The retail turnover indicator is published monthly. This indicator is important for a trader as it gives an idea of the strength of consumer spending and the level of development of retail outlets.

By monitoring the dynamics of retail turnover indicators, a trader can determine general trends and consumption patterns depending on seasonal fluctuations.

The balance of payments

The balance of payments characterizes the ratio of the amount of payments made by a country abroad in a given period to the amount received by the country in the same period. The indicator shows the ratio between exports and imports, and all transfer payments. A positive balance contributes to the growth of the national currency.

Financial and monetary policy of the government

The financial and monetary policy of the government addresses the issue of stabilizing the economic situation in the country. The regulation of taxes and spending, the provision of credit supplies, and other financial instruments affect the regulation of interrelated macroeconomic factors.

Analysis results

To conduct fundamental analysis, it is necessary to study all of the above indicators, reports on world events in the economic, political, and financial spheres of life.

Next, it is necessary to analyze which events will lead to changes in market movements and to what extent they will affect the market volatility. Fundamental analysis is considered one of the most difficult because one event that occurred under different circumstances has a different impact on the market.

In the analysis of statistical data on the above indicators, it is important to understand their significance, as well as the strength of influence of one on the other. Then the trader will be able to get a general picture of the current state of the economy and the financial market.

2TECHNICAL ANALYSIS

Technical analysis is the prediction of price changes in the future based on the analysis of price changes in the past. The main thing in the assessment of financial markets is the search for trends and convenient points for entering the market (buying or selling a financial instrument). This analysis shows excellent results in very volatile markets, so it is most often used in the analysis of commodity and financial markets.

The theory of technical analysis is based on three rules:

1. Market movements are based on a wide range of factors. Every factor that affects the price (for example, the market price of a product) – economic, political, psychological – is taken into account in advance and reflected in its schedule. Therefore, studying the price chart is a prerequisite for forecasting.
2. Price changes do not occur randomly but are influenced by specific trends. By analyzing the chart with time intervals you can get information about the patterns of price changes.
3. The history of price movement repeats itself. It is wise to apply price change models based on historical data analysis. Price changes reflect the psychology of the market crowd – participants react to similar situations similarly.

Technical analysis is considered easier to use. From several indicators of technical analysis, a trader can obtain the data necessary for forecasting. Technical analysis methods are based on the actions of the real market and the real-time data is used.

Technical analysis techniques are based on mathematical calculations (indicators) and graphical drawings (figures):

• • Candle analysis. Price charts are evaluated based on patterns and the interaction of candlestick patterns. Candlestick charts show open, close, high, and low price levels over a short period.
• • Indicators. Computational automated systems are used to determine the state of the market. For example, many technical indicators give signals when the market is overbought or oversold. Other indicators display information about the rise and fall of momentum.

The basis of technical analysis is the use of historical price information to identify recognizable and repeatable patterns. By examining the historical chart, a technical analyst can predict the price movement with a certain probability and control the risk indicators.

Traders can get the most accurate and reliable information from combining the methods of fundamental and technical analysis. Considering the influence of macroeconomic indicators and analyzing the past dynamics of price movements in the market, it is possible to predict future trends with high accuracy for the implementation of profitable transactions.