Fundamental Analysis

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What is fundamental analysis?

Fundamental analysis is the study of economic, social and political data, reports and news to gain some insight into the past, present and future direction of exchange rates. From a fundamental perspective there are many different ways to analyse currencies, we will focus on the interest rate differential model.

The future direction of an exchange rate will ultimately be determined by the underlying demand and supply for that particular currency. Using some key economic indicators, we can apply readily available data to our interest rate differential model, predicting with some accuracy present and future demand and supply and thus the direction of exchange rates.

What is the Interest rate differential model?

The interest rate differential model is based on the idea that currencies with higher interest rates appreciate as market participants move their funds to countries with a higher yield. While the average investor may not deem it suitable to send the funds overseas, savvy investors, funds and institutions have long been taking advantage of this opportunity, earning interest and capital appreciation on leveraged positions to get big returns. As a retail trader we want to be focused on taking advantage of these trends, taking positions in the spot forex market where we can also earn interest, assuming the interest rate differential is in our favour.

Most economic data and reports carry significance because of the implications they have on the future direction of interest rates. The below points look at the key components of the interest rate differential model; data and reports, which when released have an impact on the market because of their assumed affect on the future direction of interest rates. Strong data or data that beats the market’s expectations will usually mean an appreciation of a currency, while weak data or data that misses expectations will usually mean a depreciation of a currency. This is an extremely important point! Understanding that market participants will act based on their perceived outlook for a currency.

Key components of the model:

Interest rates

Interest rates are the key driver of this model but they are a part of a number of contributing factors which will move exchange rates. Interest rates are a tool used by central banks to meet a number of their monetary policy objectives, these are:

  • Keep Inflation between a target band of 2-3%. They do this by either tightening (raising rates) or loosening (lowering rates)
  • Strong and sustainable growth.

Interest rates are able to achieve the above goals as they affect the demand in an economy. When interest rates rise the cost to borrow money increases causing the amount of spending in an economy to decrease. The opposite is true when they want to stimulate demand.

Understanding how and why interest rates are used will further your understanding of the macroeconomic themes present in the Forex market. This means that when you read information from your news feed or dissect a bank report you will be able to think about the cause and effect of most economic variables being talked about.

Now that we understand what interest rates do and how they affect our model we can look at data that will help us to make trading decisions. The data or news releases will have both an immediate and long term effect on the currency.

  • Interest rate announcements
  • Central bank minutes
  • Central bank speeches

All of the above releases can either be traded once released or incorporated into your model to decide whether the currency will rise or fall based on the future direction of interest rates. Arguably the most important of these announcements is the central bank minutes. This is because is because the central bank members have effectively done the thinking for you, outlining in veiled language their outlook for that particular economy, its trading partners, the global economy and the affect this is likely to have on their decision making process in the future.

Inflation

Inflation is defined as the general rise in the price of goods and services resulting in the diminishing purchasing power of money. It is every government and central banks pet hate and keeping it under control is the main focus of monetary policy. As we can see above, most central banks will try to keep inflation between 2-3% by either raising or lowering rates. Knowing that inflation is seen as a real problem by central banks, keeping an eye on inflation data to gauge the future direction of interest rates is a key component of the interest rate differential model. The below economic indicators are common measures of inflation that are used in the model:

  • CPI, Core CPI (consumer price index) is a general measure of price inflation throughout the household sector.
  • PPI (producer price index) measure of price inflation in producer prices.

Economic growth

The economic growth of a national is central to this model as it measures the output of an economy and thus where an economy is in its growth cycle and the underlying issues that may arise as a result of high or low growth. Most central banks have the goal of sustainable economic growth of around 3% over the medium term. This means that central banks will use monetary policy (interest rates) as a means of stimulating or slowing growth within the economy. Below are some common economic indicators used to measure growth within an economy. I have included some which are not traditionally used as growth indicators, however, I did not feel they warranted enough attention to have their own category.

  • GDP or gross domestic product is a measure of the output of a country.
  • Retail sales

Employment data

In our model measuring unemployment within an economy is extremely important because of the inverse relationship that exists between unemployment and inflation. That is, the lower the unemployment rate, the greater the inflationary pressures are within an economy. This relationship is illustrated in the below diagram known as a Phillips curve.

phillips-curve

The curve shows us that as unemployment decreases inflation increases and vice versa. The reason for this is the extra pressure increased wages have within an economy on the prices of goods and services. Employment data is also a good indicator of the strength of an economy, it is for this reason the non-farm payrolls report that is released on the first Friday of the month from the United States is the most anticipated economic report in the world. In the uncertain economic times of today the world looks to this report to determine how stable the US economy is and whether they want to be taking on risk. There are a number of reports which measure unemployment/employment in a number of countries, the most notable are:

  • Non-farm payrolls (US)
  • Unemployment claims (US)
  • Employment change (AUD)

These are the main components of the interest rate differential model that you can incorporate into your trading on either a short or longer term basis. You can trade these economic numbers when they are released or you can use them to form a longer term bias for the currency you are trading. The important thing is that you understand what the numbers mean! This doesn’t mean you should know the intricacies of these reports and numbers, just that you understand the implications they can have on interest rates in the future.

As a retail trader the majority of your trades are going to come from identifying opportunities on the charts using technical analysis, you should therefore consider yourself a technician (technical analyst) rather than a ‘fundy’ or an economist. As a technician you presume that all fundamentals and anything that could affect an exchange rate is already reflected in the price/charts. In theory this would be ideal and we could forget about the fundamentals altogether. In reality markets aren’t that efficient and it pays to know these most driest of subjects (although some of us do enjoy them). For this reason, understanding the fundamentals and staying up to date with current macroeconomic themes should be a part of your trading day. Spending 10 minutes a day looking at your news feed, looking at the latest numbers to come out for the different reports, or even some fundamental research. It will ensure you are aware of the macro themes present and thus trading in sync with the current market flow.

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Metals Trading

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Gold trading has taken off since the global financial crisis as investors seek to diversify their portfolios out of cash in to tangible assets. Gold has traditionally been a preserver of wealth and is seen by some as a hedge against inflation and the devaluing of a currency i.e. a reduction in its purchasing power. As governments across the globe employ expansionary policies lead by the devaluing of exchange rates, gold’s popularity has increased beyond that of the rise in its price.

Spot Gold or Silver can be traded as either a CFD on 1:100 leverage or against the US Dollar or Euro as a currency pair on 1:400 leverage.

Gold Trading Example

Opening a Gold position

Opening the Position

The price of gold is 1660.00/1660.50 you believe that the price of Gold will rise so you decide to buy 2 Gold CFDs at 1660.50 (one contract = 10 troy oz). There is no commission to pay on any of our commodities.

Closing the Position

One week later the price of gold has increased to 1680.00/1680.5. You decide to take your profit and sell 2 contracts at 1680.00.

The gross profit on your trade is calculated as follows:

Calculation
Opening Price 1660.50
Closing Price 1680.00
Difference 19.50
Gross Profit on Trade 2 contracts x 10 oz x US $19.50 = US $390

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What influences buying and selling?

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At the most basic level, the only thing that will ever move an exchange rate is the supply and demand for that particular currency at a given point in time. In other words, if a currency is to rally there will be excess demand in the market causing this increase in price. The opposite is true if a currency is to fall in value, there will be excess supply in this case.

Any speculative transaction in the Forex market is entered into on the premise that future exchange rates will move in such a direction that the position becomes profitable. The below points give reasons why participants may form a buy or sell bias based on their understanding of the future direction of exchange rates.

  • Fundamentals – economic, social and political; data, reports and news that market participants can use to determine whether they want to be buyers or sellers of a currency. For example; investors chasing yield would invest in a currency pair with a wide interest rate differential such as the AUD/USD. This is known as the carry trade, where investors will borrow funds from a country with low interest rates and invest them in a country with higher rates.
  • Geopolitical outlook for a county or region – assessing the economic and political stability of a country or region and using this assessment to determine whether an investment opportunity may arise. For example, shorting the USD against the majors during the Iraq war had two benefits; the declining fiscal situation of the US due to the ballooning costs of the war and declining investor confidence
  • Trade flows – importers and exporters buying and selling currencies to make and receive payments for the goods and services they deal in. For example; Japanese companies selling their cars to US will require at some point a conversion from Dollars to Yen. This will increase the demand for the Yen potentially causing it to strengthen.
  • Capital flows – speculative and investment flows into and out of a currency to take advantage of higher yields, equity markets, portfolio investments and Mergers and acquisitions.
  • Technical analysis – the study of price on charts to make trading decisions. Technical indicators and analysis can give entry and exit signals for tor trades.
  • Market sentiment and climate – this can be anything from the investor confidence and the attitude of the market to risk, to the liquidity in the market.

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Withdrawal

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Withdrawal can be done using the same method used in deposit.
Check different methods to Deposit.

General rules broker will follow while withdrawal:

  • They does not allow third party payments. Funds can only be sent to an account in the same name as the trading account.
  • All withdrawals will be sent back to the original source up to the initial amount. Profit withdrawals or any amount over the initial deposit can only be sent by bank transfer.
  • In some instances, credit cards will not accept a deposit, depending on the issuing financial institution. In those situations, funds will be sent by bank transfer.

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Trading

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There are two ways Manual Trading & Automated Trading.

The decision to trade automatically or manually can at times be a difficult one to make. Some people prefer automated trading over manual trading because it is a mode of trading that has been tested by experienced traders. Alternatively, some traders – especially those with good intuitions about the market – prefer to adopt their own trading strategies based on comprehensive research about the market and trade manually. In short, before deciding on which type of trading to adopt, one should be aware of their respective advantages and disadvantages.

The quickest way for a novice to learn about the market is to engage in manual trading, which enables a trader to open or close his market position whenever he chooses. To open a trade is relatively simple: one only has to place a deposit, select a currency pair to trade in, determine the direction of the market trend, set the leverage level – specifying the stop loss and profit taking points – and then open the trade.

The steps listed above can be carried out whenever traders decide to act; for example, upon the release of an economic report that causes prices to surge. As such, manual trading can be extremely satisfying, especially for traders who spend considerable time following market behavior. That said, successful trades of course also require discipline and good money management skills.

Automated trading, on the other hand, is an extremely good way for novice traders to build up confidence about the market in order to prevent their weak psychological profiles from affecting trading. In addition, they are also able to use tested and proven strategies to help ensure the success of their trades. Even experienced traders, in fact, adopt automated trading to make trading more efficient.

The most obvious benefit in automated trading, as noted earlier, is that it frees traders from time constraints by making the practice of constantly watching the market unnecessary. If a change in the market occurs when a trader is indisposed, the automated trading system will execute the buy and sell orders that have been specified earlier.

Furthermore, automated trading prevents fear and greed from affecting traders’ decisions. Emotion is one of the biggest factors that affect profitability: fear and greed can cause us to close our positions prematurely or overtrade. In automated trading, however, computer algorithms replace the human element that leads to this emotional threat to profits.

 

You can use the Free Indicators provided in our site for trading.
If you are doing trading manually and want to automate it, please do Contact Us.

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Deposit

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Fideliscm supports following deposit method:

  • Skrill
  • Neteller
  • Local Bank
  • By Cash

Little brief of deposit methods.

Credit/Debit Cards

cards_logo_enA credit card is a payment card issued to users as a system of payment. It allows the cardholder to pay for goods and services based on the holder’s promise to pay for them. A debit card (also known as a bank card or check card) is a plastic payment card that provides the cardholder electronic access to his or her bank account(s) at a financial institution.

In case the payment is made in a currency other than bank card account currency, Visa or Mastercard payments systems’ exchange rate is used.

Wire Transfers

wireWire Transfer is an electronic payment service for transferring funds electronically between banks. Transfers can be made between personal or corporate accounts within one bank, or between accounts in different banks.

For international wire transfers, you will need the BIC (Bank Identifier Code). For wire transfers within the EU, you will need the IBAN (International Bank Account Number). For wire transfers within the US, you will need the bank’s ABA (American Banking Association) code.

Sending money through a wire transfer usually requires paying a nominal fee.

Electronic Payment Systems

skrillSkrill is a popular British electronic payment system that is acceptable world-wide. It is regulated by Financial Conduct Authority in United Kingdom. Brokers accepting this payment system confirm their valid bank account details and the physical location. Skrill was known as Moneybookers before 2011.

Skrill requires mandatory account owner verification, which can be done via confirming the credit card, the bank account or the physical address. All three methods can be used together to increase the transfer limits that are active for all customers.

Skrill charges fees for sending the funds, which is usually quite convenient for the sellers and providers of the various paid on-line services. Receiving money is free of charge

netellerNeteller was established back in 1999. It is based in the Isle of Man and is regulated by the UK FCA in accordance to Electronic Money Regulations 2011. It is a world-wide payment system that allows traders to deposit and withdraw money from foreign exchange broker accounts.

Here is the list of Neteller’s top features that attract currency traders to this system:

  • No fees of any kind when sending and receiving money within the system.
  • There is a fees for deposits and withdrawals with Neteller.
  • Pre-paid MasterCard for easy withdrawals.
  • No need to verify your identity until you decide to withdraw from your Neteller wallet.
  • Verification process usually requires just one ID document scan.
  • Neteller is a truly international payment system, allowing residents from more than 200 countries to open an account.

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A Step to Step Guide

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Don’t worry if you are beginner have no experience in Forex trading. We provide you the complete end to end guide for Forex.

We cover from learning basic to withdrawing money. In case of any doubt you can Contact us.
Some brief about what we are going to cover in each sections :

  1. Basics: Describes basic terminologies used in Forex. It will be very helpful to you while opening new account for trading. Also cover how to calculate profit/loss when any trade is opened.
  2. Open Account: We recommend you to open an account with our partner broker. If you open account as our client we are here for you 24×7 for any kind of problem you faced during withdrawal, deposit or anything.
  3. Deposit: Tell about different deposit methods.
  4. Trading: You can use our Indicators to do trading. And the best part is it is free for all.
  5. Withdrawal: Tell about different withdrawal methods.
  6. Finish: Happy Trading.

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