Friday, May 12, 2017
Fundamental Analysis & Fundamentals Trading Strategies
In the stock market, the fundamental analysis seeks to measure the true value of a company and to base the investments in this type of calculation. To some extent, the same is done in the retail forex market, where fundamental forex traders evaluate currencies, and their countries, such as companies and use economic announcements to get an idea of the true value of the currency.
All the news reports, economic data, and political developments that come out of a country are similar to the stories that arise about a stock in which it is used by investors to get an idea of value. This value changes over time due to many factors, including economic growth and financial soundness. Fundamental traders look at all this information to evaluate a country's currency.
Since there are virtually unlimited trading strategies for fundamental data-based forex fundamentals, you could write a book on this topic. To give you a better idea of a tangible trade opportunity, we will go through one of the best known situations, the Forex take the trade.
A forex breakdown leads the trade
Foreign exchange trading is a strategy in which a merchant sells a currency that is offering lower interest rates and buys a currency that offers a higher interest rate. In other words, you borrow at a low rate, and then lend at a higher rate. The merchant using the strategy captures the difference between the two rates. When trade is well exploited, even a small difference between two types of interest can make trade highly profitable. Together with capturing the rate difference, investors will also often see the value of the highest currency rise while the money flows into the high-yielding coin, which bids up its value.
The real-life examples of a yen carry trade can be found from 1999, when Japan decreased its interest rates to almost zero. Investors would capitalize on these lower interest rates and lend a large sum of Japanese yen. The Lent yen then becomes US dollars, which are used to buy US Treasury bonds with yields and coupons at around 4.5-5%. Since the Japanese interest rate was essentially zero, the investor would be paying next to nothing to borrow the Japanese yen and win almost all the performance in his US Treasury bonds. But with leverage, profitability can be greatly increased.
For example, 10 times the leverage would create a 30% return on a 3% return. If you have $1,000 in your account and you have access to 10 times the leverage, you will control $10,000. If you implement the carry trade currency of the preceding example, you will earn 3% per year. At the end of the year, its investment of $10,000 would be equal to $10,300, or $300 gain. Because you only invested $1,000 of your own money, your actual profitability would be 30% ($ 300/$1000). However, this strategy only works if the value of the currency pair remains unchanged or appreciated. Therefore, most Forex traders take a look not only to win the interest rate differential, but also the surplus value. Although we have simplified this transaction a lot, the key to remembering here is that a small difference in interest rates can result in huge gains when leveraging is applied. Most currency brokers require a minimum margin to gain interest in transportation operations.
However, this transaction is complicated by changes in the exchange rate between the two countries. If the lowest-yielding currency appreciates against the higher-yielding currency, the gain between the two returns could be eliminated. The main reason that this can happen is that the risks of the higher-yielding currency are too much for investors, so they opt to invest in the lowest-yielding and safest currency. Because transport shops are longer-term in nature, they are susceptible to a variety of changes over time, such as the rates of increase in the lower-yielding currency, which attracts more investors and can lead to currency appreciation, the decrease in the yields of the transport trade This makes the future direction of the pair of currencies as important as the difference of type Of interest.
To further clarify this, let us imagine that the interest rate in the United States was 5%, while the same interest rate in Russia was 10%, providing a trade opportunity for traders to cut the US dollar and leave the Russian ruble. Suppose the merchant asks us $1,000 to 5% for one year and converts it to Russian rubles at a rate of 25 USD/rub (25,000 rubles), investing the product for a year. Assuming there are no currency changes, the 25,000 rubles grow to 27,500 and, if they become US dollars again, it will be worth $1,100 us. But because the merchant lent us $1,000 to 5%, he or she should $1,050 us, making the net trade product only $50.
However, imagine that there was another crisis in Russia, such as the one seen in 1998 when the Russian government defaulted on its debt and there was a large devaluation of the currency in Russia when market participants sold their positions in Russian currency. If, at the end of the year the exchange rate was 50 USD/rub, its 27,500 rubles would now become only $550 us (27,500 rub x 0.02 rub/USD). Because the merchant must $1,050 us, he or she will have lost a significant percentage of the original investment in this transport trade due to currency fluctuation-even though interest rates in Russia were higher than the United States
Another good example of Forex's fundamental analysis is based on commodity prices.
He must now have an idea of some of the basic economic and fundamental ideas that underlie the currency and impact on the movement of currencies. The most important thing to remove from this section is that currencies and countries, like companies, are constantly changing value based on fundamental factors such as economic growth and interest rates. You should also, based on the aforementioned economic theories, have an idea of how certain economic factors impact a country's currency. Now we will pass to the technical analysis, the other school of analysis that can be used to collect the trades in the forex market.
Source:www.investopedia.com/university/forexmarket
All the news reports, economic data, and political developments that come out of a country are similar to the stories that arise about a stock in which it is used by investors to get an idea of value. This value changes over time due to many factors, including economic growth and financial soundness. Fundamental traders look at all this information to evaluate a country's currency.
A forex breakdown leads the trade
Foreign exchange trading is a strategy in which a merchant sells a currency that is offering lower interest rates and buys a currency that offers a higher interest rate. In other words, you borrow at a low rate, and then lend at a higher rate. The merchant using the strategy captures the difference between the two rates. When trade is well exploited, even a small difference between two types of interest can make trade highly profitable. Together with capturing the rate difference, investors will also often see the value of the highest currency rise while the money flows into the high-yielding coin, which bids up its value.
The real-life examples of a yen carry trade can be found from 1999, when Japan decreased its interest rates to almost zero. Investors would capitalize on these lower interest rates and lend a large sum of Japanese yen. The Lent yen then becomes US dollars, which are used to buy US Treasury bonds with yields and coupons at around 4.5-5%. Since the Japanese interest rate was essentially zero, the investor would be paying next to nothing to borrow the Japanese yen and win almost all the performance in his US Treasury bonds. But with leverage, profitability can be greatly increased.
However, this transaction is complicated by changes in the exchange rate between the two countries. If the lowest-yielding currency appreciates against the higher-yielding currency, the gain between the two returns could be eliminated. The main reason that this can happen is that the risks of the higher-yielding currency are too much for investors, so they opt to invest in the lowest-yielding and safest currency. Because transport shops are longer-term in nature, they are susceptible to a variety of changes over time, such as the rates of increase in the lower-yielding currency, which attracts more investors and can lead to currency appreciation, the decrease in the yields of the transport trade This makes the future direction of the pair of currencies as important as the difference of type Of interest.
To further clarify this, let us imagine that the interest rate in the United States was 5%, while the same interest rate in Russia was 10%, providing a trade opportunity for traders to cut the US dollar and leave the Russian ruble. Suppose the merchant asks us $1,000 to 5% for one year and converts it to Russian rubles at a rate of 25 USD/rub (25,000 rubles), investing the product for a year. Assuming there are no currency changes, the 25,000 rubles grow to 27,500 and, if they become US dollars again, it will be worth $1,100 us. But because the merchant lent us $1,000 to 5%, he or she should $1,050 us, making the net trade product only $50.
However, imagine that there was another crisis in Russia, such as the one seen in 1998 when the Russian government defaulted on its debt and there was a large devaluation of the currency in Russia when market participants sold their positions in Russian currency. If, at the end of the year the exchange rate was 50 USD/rub, its 27,500 rubles would now become only $550 us (27,500 rub x 0.02 rub/USD). Because the merchant must $1,050 us, he or she will have lost a significant percentage of the original investment in this transport trade due to currency fluctuation-even though interest rates in Russia were higher than the United States
Another good example of Forex's fundamental analysis is based on commodity prices.
He must now have an idea of some of the basic economic and fundamental ideas that underlie the currency and impact on the movement of currencies. The most important thing to remove from this section is that currencies and countries, like companies, are constantly changing value based on fundamental factors such as economic growth and interest rates. You should also, based on the aforementioned economic theories, have an idea of how certain economic factors impact a country's currency. Now we will pass to the technical analysis, the other school of analysis that can be used to collect the trades in the forex market.
Source:www.investopedia.com/university/forexmarket