Fundamental Analysis SIMPLIFIED: The Ultimate Guide for Traders

[00:00:00] Speaker 1: All right, you guys, we've been asking for it. It's time to get into some fundamental analysis. In today's video, we're going to do a sort of beginner slash introduction to fundamental analysis for people out there who want to incorporate it in their own trading. It is a key component to my trading strategy is, you know, using fundamentals to help guide my directional bias in various markets in the currencies, as well as even in the stock market and other places as well. But today I'm going to give you guys sort of an introduction. I know on YouTube, it is very popular to talk about the technical side, and I think I have some pretty good videos on those subjects, things like moving averages and Fibonacci retracements and support and resistance. I find that stuff valuable. But today I think we need to dive in a little bit on the fundamental aside. So before we get going, do me a favor and just like the video down below if you like my content and subscribe to the channel if you're new so that you can watch more of it in the future. Okay, let's get into it. So fundamentals, why they matter? Well, fundamentals, there's some mixed opinions here. The reason a lot of people don't talk about fundamentals is because, quite honestly, they are a little bit more difficult in my view than technical analysis. We all kind of understand the concept of supply and demand or looking for levels on a chart where things could reverse or continue. That sort of makes sense to a lot of people. But fundamentals, truth be told, they are still something that I am continuing to improve on and learn. Like, I've been doing this for a while and there's a lot to this stuff. It is not a simple thing. There's a reason why people go to college for economics and they look at this stuff in depth. And, you know, most of the people that work in major institutions or even the central banks, they have PhDs in this stuff, if not multiple, and they take it very, very seriously. So why should the average person care? Well, some people say you don't need it. Others say, you know, you do need it. I think that it really helps me because I personally like to understand why, at a basic level, am I buying the US dollar or buying the euro or buying the yen? Why am I buying it? Or why am I selling a currency? Understanding the economies that we are working with and sort of trying to get an idea of whether or not a economy itself is healthy or sort of diminishing can be a huge help in guiding my currency trades. Fundamentals are truly what drives a market's value, right? If an economy is doing well, their currency could reflect that. If an economy is doing poorly, it could also be impacting their currency as well. Fundamental trends, they can last from minutes to years. So if you get a news release, obviously that can have a lot of impact in the short term. But in terms of long term, there also can be some major, major impacts from economic data and all the stuff that we're about to get to in this video. For me, fundamentals help me pick a direction while technicals help me pick entries and exits. I'll say that again because it's kind of important. So I use fundamentals to help me pick direction. One of the biggest criticisms that people have for fundamentals is that it doesn't really help you so much with timing because fundamentals can be quite, they can, again, they can last from minutes to years. So their impact can be sort of, you could be bullish on a currency and that currency could go down for quite a while before it actually ends up going your direction that you had a bias on. So fundamentals for picking a direction, whereas I use technicals to sort of look for entries and exits if that makes sense. So technicals are sort of my in and outs and then fundamentals helped me actually pick the direction that I want to trade in. Okay. So there's three pillars. There's three main pillars that we're going to cover in this video for this sort of introductory level. Now, please note, we could spend hours and hours on each one of these things. There's a lot to this stuff. And I would be, I would be not telling the full truth if I didn't tell you that, you know, there's a lot of stuff here. This is not something that is easy and we're going to be able to get through in just a few minutes or anything like that. This is going to give you a surface level understanding of these concepts so that you can go take more time to go read more in depth and look more in depth into this stuff. There's reasons why there's entire, you know, companies around producing this content. In fact, my company, A1 Trading, we are trying to do our very best to sort of put out content that helps people decipher all of the information that is flowing around this stuff. So let's try and dive into these main three pillars. The three pillars that I have listed here are going to be economic data. These are things like unemployment rates, GDP, interest rates, et cetera. And then central bank decisions, which are, you know, things like the Federal Reserve in the United States or the ECB in Europe or wherever, right? And they have monetary agendas or policies that they can put in place to try and strengthen or weaken in some cases their own currency, which sounds weird, but sometimes you might actually, some, some central banks might actually elect to weaken their currency on purpose. So we'll talk a little bit about that as we get along again, just buckle up, stay tuned and let's keep going. So the last one is going to be geopolitical events. Now we probably all know about these, whether, whether or not, you know, we incorporate them in our trading. It is something that we all are impacted by, especially if you are in a region where something like this is occurring, something like, uh, some sort of war, or we are all facing at the time of making this video a global pandemic. And then you have things like, for example, Brexit. These are regional things that can happen and they can impact economies and they can impact currencies. Okay. So those are the three pillars. Let's dive into each one individually. So the first one is going to probably be our longest one. This is going to be our economic data. So these are, um, measurements and data points that people, you know, keep an eye on in terms of trading. The first one is going to be interest rates. Now an interest rate to sum it up, or I got this definition off of Wikipedia, I believe an interest rate is the amount of interest due per period as a proportion of the amount lent deposited or borrowed. The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent deposited or borrowed. Oh, that was a lot. But the idea basically is that higher interest rates in an economy or in, you know, by a central bank are viewed as hawkish or good for a currency, making it more, um, valuable, right? If a bank is offering you more interest, if a bank offers you 2%, uh, in another country, and then it offers you 0% or even negative in another country, you'd probably rather, if you had to stick your money somewhere, you'd probably rather put it in the place that offers higher rates. So long as the economy is stable underlying, uh, where your money is. So that's the first one interest rates. Now we can look at an example here. You can see here's Canada's interest rate. Now we shouldn't pick on Canada too much because all interest rates around the world right now, for the most part, many, many countries have cut rates dramatically to sort of, um, cope with or deal with the, uh, the 2020 pandemic that we face now. Um, cutting rates is a way to sort of stimulate economies. And it is usually seen as sort of a concerning thing for a currency, because if you have to cut rates, it means that, Oh, you know, the, the economy underlying could be in trouble and they need to cut rates. And it also makes, again, going back to that, where would you stick your money? If there's less currency or less interest being offered in a certain country, you may be less interested in, you know, parking your money there, if that makes sense. So, you know, for the big, big players that have billions and trillions of dollars, big institutions and companies and, you know, big, uh, people groups that want to put money somewhere. If there's less interest offered in say Canada, maybe they're less interested in parking their money there. And maybe they'd rather park it somewhere else, you know, just a simple, simple concept. Um, now the next one is going to be inflation rates. Now inflation, this gets tricky really quick. So I'm going to do my best to explain this, but if you need to rewatch this, you can just back up in the video. But, um, inflation is the rate at which the value of a currency is falling. And consequently, the general level of prices for goods and services is rising. Okay. Inflation. Um, there's actually a healthy level of inflation. People always view inflation as bad because locally it is perceived bad because if your currency is, um, you know, losing value, right. They're printing more of it, or, you know, the value of your single us dollar or your, your Canadian dollar, wherever you are in the world, right. If that's losing value, it's seems bad. However, there is a healthy level of inflation that comes along with a healthy growing economy. Um, you know, it kind of makes sense that if a, an economy is strong, then, you know, consumers are bidding up prices. They're buying things and, and good goods are becoming, uh, more pricey just because people are out there spending it. Right. So, and things are getting more competitive and the job market is getting more, you know, all that sort of stuff comes into play. So there is a healthy level inflation. So I should say that, um, according to forex factory.com, another good way of saying it is inflation is important to currency valuation because rising prices lead the central bank to raise interest rates out of respect for their inflation containment mandate. So back to what I just said earlier about, uh, interest rates. Remember hiking interest rates are, is good for a currency. It is considered, um, you know, hawkish or bullish. Now that is a bit confusing because again, too much inflation bad because it really hurts, uh, you know, the, the value of, of, um, citizen money. Right. But too little inflation is also bad. So please know, uh, basically if there's too little inflation, that basically means that, you know, people are not spending their money. Consumer demand is low. Um, that's bad for, for, you know, GDP that's bad for growth. That's bad for, um, potentially jobs, right? So deflation is also not good. So we're going to look at a visual in just a moment, but, um, let's, let's just know that basically too much inflation equals bad and too little inflation also equals bad. Now this visual is one that I put together. Feel free to pause the video. You can screenshot this if you want, you can make your own. Um, this helps me a lot to understand this concept because I'm a, I'm a visual learner. So I like to see something, um, that helps me with this stuff. Okay. So what I should show you is that over here, you can see that we have inflation on the Y axis and we have interest rates on the X axis. And again, all of these things are reported by central banks. We can see what the numbers come out to a common way to measure inflation is CPI. I actually have a video on CPI. If you want to look up Trader Nick CPI on YouTube, maybe after this video, you can go watch that if you want more on the actual, um, way they calculate, uh, inflation in, in the U S and in Canada and some of the other places. Um, so, but please know that basically interest rates are what we really care about interest rates going higher. Hiking is generally a good thing for a currency as it attracts more buyers. And then when they cut rates, it's generally viewed as not so good for a currency because people are going to be less interested in owning that currency or buying into that economy because there's just less yield there for, you know, lending to that, to that country. So when we're looking at, uh, this chart, if we see, you know, inflation rising, what that means is that economies are growing at a rapid pace, uh, or, you know, the value of money is decreasing quickly because either prices are bidding too much or they're printing way too much money, uh, by the central government. Now, if prices get too high, if inflation gets too high, what we see is we usually see a rate hike. Okay. So if we're, if we're on the edge of inflation where we're seeing a lot of inflation, which right now the U S as we make this video right now, um, inflation is, is being watched closely and people have concerns that inflation rates are rising. Uh, why is that concerning? Well, rate hikes are good for a currency, but not necessarily good for the stock market or for stocks that need to borrow money. Because although it's good for lenders, it's not great for borrowers, right? Companies that need to borrow money. If they have to borrow at a higher rate, it's worse for them. Uh, lenders, it's better because if you want to lend to the United States, you get paid a higher amount, right? In terms of, uh, interest. So that can be viewed as good for the currency, but not necessarily great for stocks. Um, but anyways, higher inflation, if we're at a high point in inflation, we see the CPI numbers coming out high. Oftentimes we can see, uh, the fed sort of rate hike. They raise the interest rate. Um, and that can be good for the currency. And again, not so great for economies. Now there, I should say that there is an ideal rate of 2%. According to the fed, um, you know, their, their sort of, uh, target is to hit 2% inflation because that's sort of a steady rate. Uh, obviously too little inflation, like I said, is also bad. We get deflation. If we see this, um, you know, this is where we can get negative interest rates. And this is also not good because that's not attractive to your country. You want, you want people to be putting money into your country, not leaving, right? Too much leaving is not great. Uh, and inflation, unless, unless of course you're trying to purposely devalue the currency, which we can talk about in just a moment. Again, I know there's a lot of moving parts here, so feel free to rewatch this video if you need to, or watch it multiple times or save it, whatever you need, you need to do. But inflation should be also noted that, you know, raising inflation, rising inflation obviously creates a weaker currency as things, as we print more money, as, um, you know, money loses its value that causes a weaker currency and vice versa. Deflation causes an expensive currency. However, remember, so as we weaken, as we weaken though, we can cut, we can hike rates, which can cause the, the currency to again, gain back some of that value. Um, I'm trying to do my best to explain this stuff again. I, I find this visual helpful. You guys might, um, you might agree, you might disagree, but for me, this is just the easiest way to understand it. That 2% is the ideal sort of inflation rate. Things can be cut when inflation is looking not so, not so good, right. Less than, less than desired. And it can be hiked when things are getting too, uh, too fast. This can oftentimes be due to, you know, a rapidly growing economy. That's not sustainable. Um, they can hike rates to sort of try and, uh, stunt that growth, which sounds weird, but you want to have like a healthy level of growth ideally. And so that's the, that's the theory there. Okay. And I know I'm not, I'm by no means like a masterful economist. I didn't go to school for this or anything like this. This is stuff that I've, uh, just put together and learned over my time as a trader. Um, so please understand there, there might even be better explanations out there. And if I'm not doing the best job, then I apologize, but this is just the way that I understand it. So let's talk about GDP. The next one is GDP. This one is a little bit easier. Um, so GDP is gross domestic product, and it is basically a monetary monetary measure of the market value of all the final goods and services produced in a specific time period. So growing GDP equals good, diminishing GDP equals not so good, right? If economies are growing, if more businesses conducting, if things are going well, GDP is rising and that is considered good or bullish for a currency because there's more demand for that currency. If there's a lot of business going on in the U S what do people need to do business in? If they want to do business in the U S they need U S dollars, right? So that can create demand for the underlying currency. So, uh, next one is unemployment rates. So unemployment rates are also fairly simple. There's a big definition there that you can read, but the very simple version is more jobs equals good for the currency and less jobs equals bad for the economy or the currency, right? So if there's, um, you know, rising jobs, another thing, like if we're seeing consistent growth in jobs as we're seeing right now in the U S that's considered a bullish, right? Because that's, that's showing growth because unemployment rate, if unemployment rate falls and jobs are being created, that is good for GDP, right? That's the theory and good GDP can cause, um, positive growth and maybe even inflation, which again, going back to our concept here, if inflation is rising, what does that potentially mean? Rate hikes, which are bullish for the currency. It all kind of ties together. I know it might take a few times watching through this. I needed a lot of time. And this took me a long time to sort of understand to the point that I'm at. Um, so, you know, I don't blame you if you need to watch it again or go back, but central bank policies. Now this is the next one. Um, so the central banks around the world, whether it's Australia, whether it's Europe, whether it's the Fed from the U S, um, they all have sort of an agenda. They all have sort of a target goal. Like I said, they want to be, you know, hitting that target inflation rate. They want to be, you know, raising rates if they need to, or cutting rates if they need to. And they all have sort of a plan. And the cool thing is they actually make their plan directly available to us in the form of statements. They tell us what they want to happen so that it can help actually make it happen. Right. If, uh, Switzerland right now, if they say they want to weaken their currency on purpose, then that can be, um, considered, you know, that's their agenda. They want that to happen. They're not trying to trick you. They're telling you, you know, we're going to do what we can to weaken our own currency. Why would somebody want to weaken their own currency? Well, here's the simple, I didn't make a slide for this, but I'll tell you guys the basic idea. Weakening your own currency can be arguably good for trade. If your currency is less valuable than my currency, then it's easier for me to do business in your country because I can, you know, in my own currency, my own currency goes further in your country, which makes it easier for me to do business in your country, which is good for what? GDP. What is GDP good for? It's raising, you know, the growth in your economy. And so, um, that's the idea, right? So purposely damaging your or not damaging, but weakening your own currency, printing more money, uh, can actually be in the longterm, a great strategy to sort of make trade more competitive. So more businesses will want to come to your country or, you know, um, exports can do better in your country, right? Um, that's the, that's the sort of idea. Now it hurts imports because why, if you're, if your country's currency is weak, it costs way more in your country to buy something from a, another country where the expensive currency is, right? So it's understanding this concept, um, that can go a long way. Now, geopolitical events. This is the next thing I want to talk about. So this one we sort of touched on in the beginning, but there is change happening everywhere in the world, right? And change can cause market participants, traders, investors, companies to pull out of countries, to move their money around, to take their money out of things that they're concerned about, or put money in things that look really promising. Terrorist attacks, elections, wars, and even lately presidential tweets can have a direct impact on the market and the valuations of currencies and, uh, you know, indices and bond markets, all that stuff can be impacted by these real world stuff going on. Now keep an eye on these things because the latest developments can actually really cause some big moves and they can form. And I want to encourage you guys to form your opinions based on the facts out there. There's always like, um, sort of, uh, you know, drama and stuff going on in the world, but just looking at the facts and looking at objectively what's going on can be a really big help. A lot of times people get their political and their opinions into their trading. I would highly encourage you to avoid that because your, your emotional based opinions on politics on developments or whatever can really be a hindrance to your trading. Look at things objectively, look at how the market views something and go with that. Don't just let your emotional, uh, reaction to something. Let's say you don't like Donald Trump or you don't like Joe Biden. If you let that dominate your mindset when you're trading, it can cause you to miss out on some great moves or to fearfully, you know, not do something that you should have, you should have gone for. Right? So don't let your biases and your, uh, you know, I should say your emotional biases biases form your objective biases. Okay. So don't get overwhelmed. I know there's a million things to look at when it turn, when it comes to the whole world, there's so many things going on. So for me, the major things that I look at are just the most major market moving events right now, that would be the global pandemic. Uh, maybe a year ago, a year and a half ago, maybe that was Brexit, right? Keeping an eye on those things and the latest developments in those areas and where it seems to be headed can be a really good way to form trading biases in your fundamental analysis. Again, what we're going to do here is we're, we're piling all these things together. We're looking at the geopolitical events. We're looking at the economic data and we're looking at the agendas of the central banks to try and tie it out and all together. Now I should say bringing it all together is not easy. It takes a lot of practice and it's not something that, you know, you're just going to be like, okay, I'm just, you know, I looked at all this stuff and now I know exactly where the currency's going. And if it was that easy, it would be great. But this is why a lot of people shy away from fundamentals is there's a lot to it. It's not a super easy thing like, oh, just buy support, right? And although I know, you know, there are people out there who are just good with their technicals to the point that they don't really pay attention to fundamentals. I find it very, very helpful to look for dominating fundamental based trends that are going on. Things like buy the rumor, sell the news are based off of the idea of buying a fundamental rumor. Like, um, you know, so such and such company is talking about potentially releasing a new major product that could change their market value. And, you know, then you go buy the company because you believe that it has, you know, good promise and then it works out and then the, the company flies up, right? That would be a stock scenario, but this happens in currencies. It happens in all sorts of stuff, right? So that's how I would say, you know, these are all the different components. Maybe in a future episode, we'll talk more about combining them all together. But the basic idea is, you know, take a look at all of these things. They all matter and sort of, you know, base your own, uh, make your own decisions based on the facts that you have available to you. If they're available to you, you might as well use them. That's how I view this stuff. So, um, you know, pay attention to what is currently moving the market the most because this changes over time, right? The political events, they can definitely change. If there's an election going on that can absolutely cause, uh, the, you know, be the dominant headline for months at a time. So moving with the latest developments and even trying to get in front of them, that's where some of the best sort of fundamental trades can come in and then combining them with your technicals, right? So everything that we've talked about here, you're just combining that on top of your, your technical and sentiment based analysis. That's at least how I do this. So I'll look at all this stuff first. I'll have a, a overall view of what I, you know, what I'm bullish on and what I'm bearish on and my bullish on the U S dollar, my bullish on the pound. And then from there, I will look for technical setups that match up with my criteria. So that's all I've got for you guys. Before we go, um, I do want to say, join the newsletter in the description. We're sharing ideas, fundamental and technical in our email newsletter. So you can get this sent directly to your phone or to your, um, to your email and you can check out what we are looking at in the markets. My team and I, we put out a lot of research and work for you guys. Um, that's sort of what our company does. So if you enjoy this sort of content, also make sure to subscribe to my YouTube channel here for more. I do, you know, live streams and content that, uh, might be helpful to you in your journey. Again, all of it is free. So I do ask if you liked this video, uh, please make sure to leave it a thumbs up down below and subscribe for more. Thank you guys so much for being here and we'll see you back in the next one.