How do bankers trade forex? Part 3: The Fundamentals

Hi everyone, it's Brad Gilbert, and I'm back for part 3 ofHow Do Bankers Trade Forex? and this is all about fundamental analysis the keyfundamental drivers of the market it gives the currencies direction, now forthose new traders who have been sort of all the Googling around or looking at indicatorsand using that the general trade direction or entry levels you've got itall wrong, right the whole financial market system whether it's Forex, derivatives, futures anything it all comes back to the economic data, thefundamental drivers, now there's a number of key components to this that you needto understand, it really does start with the central bank's, once you understandthe central bank's and how they read the economic data, well then what you can dois you can forward project their thinking, by looking at the economicnumbers and then reacting to what those outcomes are from the forecast.

So thismay sound really complicated but it's not, and you don't need an economicsdegree to grasp the concept that's all that actual versus variance, and what I'mtalking about there with is with the central bank meetings as well as theeconomic data releases themselves.

The market projects the forecast and thenreacts to the actual outcome, and that's the way the financial market works it'svery simple, right but it does get complicated when there are certainthings like geopolitical events Brexit for instance Donald Trump is creatingall sorts of issues with this new tax reform also creating issues with NorthKorea etc etc you get the picture, those geopoliticalevents blow out the general flow of the economics or the key fundamental driverswhich is the central banks and the economic data, but you take thosegeopolitical issues out, that's when you get good trending markets and that'swhat we sort of got at the moment with the Fed they have been raising rates itgives us a general upward buy sentiment positive tone for the US dollar now allwe have to do to look for those really low risk high probability tradingopportunities, is to look at the data that matches the central bank'ssentiment, that's strong numbers strong US numbers, you get that pictureand then you overlay with your technicals and we're getting very close to theoverall big trading picture and methodology that you need to adopt, right.

It doesn't mean you can't include specific indicators and these things inthere to enhance your probability of success but the fundamental drivers thefundamental analysis, okay and I know a lot of traders out there and a lot ofeducators for that matter, tell you to stay away from the fundamentals andthat's primarily because they've never actually learned them, they don'tunderstand them they never worked in the banks and anyone that actually says thatask yourself the question, how much experience have you really got? All rightso what I'm gonna do is just bring you through a general slide show, it's easierto explain the concept of the fundamentals through that, and then oncewe've gone through the slides I'll come back and I'll show you where wereally connect to the market it's using a product (one of Reuters products) Reuters Xenith, this is where your connection to the market with thenews, the real-time economic data releases, and just a general momentum ofwhat's going through the market, all right, I'm sure this is going to be a bitof an eye-opener for you, so sit back and relax.

Won't take long, I'm not going to talklonger than I need to and we'll start with a slide show now.

All right here we goas I said for a lot of new traders, this is going to be a bit of aneye-opener for you, and that will really explain why the markets go up and down.

All right, now, what are the fundamentals providing the answers for? Well, prettymuch everything, your trade decisions, whether your going to buy or sell, it allcomes from this epicenter the fundamentals, the market determines anddictates what you do and when you do it and it comes from the fundamentalsthemselves, and these, because of that, because you're getting the actual timeto trade and the direction, whether you're buying or selling, this isabsolutely critical to your overall success if you don't understand this well youknow what you can have some limited success, but you're not going to be aFull Time Professional Trader.

It's key to get your head around this area, andwhy? Once again, it all comes back down to currency direction, right, there's no need to sort of guess are other currencies going up or arethey going down, look at the fundamental drivers it will tell you, it is going upor it is going down, what's going sideways and that's when trading becomeseasy okay, as I've mentioned there's three main components which make up theoverall fundamental analysis okay, you've got the central bank's, the geopoliticalissues, and then most importantly also right behind the central banks, theeconomic data releases, now imagine these things going into a cylindrical conelike the picture here, now if there's no sort of major issues they will flow straightthrough and give you nice trending markets, if any one of these areas isuncertain or discombobulating, well then, they're not going to really come outmaybe sporadically, and that's pretty much the way the market works if we getnice conditions for these three components we get really nice trendingmarkets.

If we don't get those conditions well then you know trading isa little bit patchy and you have to understand your performance comes backto what the market gives us, and that's why the fundamentals are so important.

Now first of all central bank announcements, okay, now we've got this8 major central banks connected to the, like I said like the G8the big currency pairs.

Okay, the Reserve Bank of Australia, ECB, Bank of Canada, Bank of England, the Fed (the epicenter of all financial markets), Bankof Japan, the RBNZ and the Swiss National Bank.

Now these central banks they meet every four to six weeks and it is veryimportant you understand how they work.

As I said, the trends market directioncomes specifically from the central banks, now who is the most important? Wellit starts at the top, the Governor the, President the person in charge is themost important person to us as traders and when they are speaking, we listen, they're the ones that deliver the statement, after the interest ratedecisions and they're the ones had probably had the balance of power oninterest rates themselves so it's very important we understand what they'redoing.

Now why are the central bank so important?Well they reset sentiment at each meeting.

Okay what they do is they gointo the meetings themselves, they discuss the overall economic conditionsthe past month, and then they work out through a number of guides whether it'sthe inflation guide, which generally historically they've had a band betweentwo and three percent, if interest rates, I mean if inflation goes above threepercent that would raise rates, if inflation went below two percent, they wouldcut rates and that sets the tone for the currency for the next month, until thenext meeting.

So that's where we can get clear sentiment changes and when wedo they are huge trading opportunities, nowlet me just wind that back just a touch there's there's three major ways, thatpeople or traders categorize the sentiment from the central bank's, okay aHawkish tone, well it's a Bullish bias okay they're talking the prospects ofrates up, a Bearish or Dovish tone, a Dovish tone is Bearish, they'resort of thinking, well things aren't looking so good we may have to cut ratesthat would be Dovish, if they're neutral but they basically say look economicconditions aren't changing there's nothing to do, well then that's aneutral tone and there'll be no bias out of the meeting, you know there could be a good trading opportunity or not, but generally when you do get a Bullish orBearish tone, okay that's when we get some serious big moves in the market.

Butnow understanding the sequence of the central bank releases is very important, right, they have their meeting and out of that meeting at the same time comes arate decision and the statement.

Usually, a week later you get the minutes which ismore detailed analysis of the overall statement and what was actually said inthe meeting, but the two most important things are the rate decision and thestatement itself they're the two things you need to focuson.

So, how do the central bank's link all the data together? Now I sort of justbriefly mentioned it but let me just run through that again.

So at this CentralBank meeting, you have the rate decision then you also get the statement releasedat the same time, explaining what they did with the ratedecision whether it's hiked, a cut or neutral and what their forwardprojections are what they think they're gonna have to do next month, right andout of that, out of those two features right you get market sentiment, andthat's very important because that's that's what we're looking for what's thedirection from the central banks.

This is where the core, overall trends come fromin the market, right so when do those economic data releases come in toplay? Well basically, the central bank's each month, they piece together theeconomic numbers and that's where they determine the next rate decision orstatement.

If we see really strong economic numbers, okay around the big keydata that they look for, retail sales, employment numbers, CPI, manufacturing, these sort of components that leads them into the next interest rate decisionthat's why traders watch those economic data releases closely because theyactually know what the central bank is going to do because in the previousstatement they tell them what they're going to be looking for.

Okay now the central banks sentiment itself, the first two weeks of everymonth are usually very clear, that's because we've just got a freshstatement from the central bank it will tell you specifically we're looking atemployment, we're looking at inflation, we're looking at average earnings, allthese various components so after the news is released for the first two weeks, the market is very focused on that but that sentiment over the course ofthe month fades, okay once you get closer to week four and so some of the centralbank's they have their meeting every, say every six weeks, as it gets closer to thenext meeting, traders let go of the previous sentiment, they're now focusingon the economic numbers in front of them and forward projecting the nextsentiment of the central bank.

Okay so understand that, straight after themeeting the first two weeks very good for direction after that it starts tofade as traders focus on the next meeting coming up.

Now if you're thinkingof just jumping in and trading these central bank meeting announcements, wellyou may want to think again, because there's a number of variables here thatcome out, okay now with all the quantitative easing we've seen over the last, seven oreight years there's whole heap of things to consider, there's the interest rate decision, there's lending facilities, you've got, you know, all thequantitative easing components and what you're really looking for is the ratedecision, statement, then they generally have a press conference about 45 minuteslater, in the way that ECB do it.

So you've got variables here, this isn't assimple as trading an inflation number or a GDP number or a retail sales for thatmatter.

There's a number of things to consider and when they have pressconferences that can get a bit convoluted because they have a chance togenerally talk things up and then the next sentence they can talk things downso just be aware, sometimes the best trading opportunity if they're notchanging interest rates is probably after the event, like I'm talking abouthalf an hour or an hour afterwards, right you're going to miss a lot of thevolatility around that, you may be some of the moves, but I can tell you what, you're gonna save yourself a few bucks as well.

Now what's so important aboutthese Central Bank meetings? Okay let me just wind back even a touch furtherthe average daily range for the major currency pairs is a 150 points in aday, now that really comes from the central banks, the currencies generallymove one percent over the course of a day the central banks were usuallyintervene to slow the currencies down right and that's that's a key componenta lot of people don't get right, so but, on a central bank meeting right they'remaking the announcements they want the impact so that they don't slow themarket down on those days and if they change policy, or announce somethingunexpected, you can get absolute massive moves generally around the 250 to 300point mark, right so understand on a massive economic data release we may see150 point movement on the currencies on a central bank announcement it's muchbigger and the potential for big gains is there.

Right, now just on these charts, let me give you a couple of examples herethe RBA, okay, surprised us with a rate cut the 160 point moved to the downside, and then flowing from that, right that was a change from raising rates, to neutral, to now cutting, that'schange in sentiment which is in the market for some time and thefollow-through was over 500 points to the downside and that's why theseannouncements are very important.

Now you might have missed the first announcementyourself but you can see you get that back in on a rally and then you'relooking in for the next major move, and this EBB surprise rate cut, samesituation, initial move on the announcement, 220 points, all right, thenwe look for the retracement and then it starts to drift off from there as well.

But this did the same with all the major currency pairs, the FED, okay disappointswith no tapering, so what we see straight after the move, hundred and thirty pointmove quickly to the topside okay, takes about three hours, and thenthen it starts to drift sideways after that, this sort of change in sentimentfrom the Central Bank is very important and it's important that you understandwhat it means for after the event.

So sometimes it's only going to tradesideways, or it's going to continue in the direction that it's actually justmoved.

All right, now let's just get on to the economic data, right this is what thecentral banks are looking for, and the easiest way to think of it is, they arethe fundamental drivers of the currencies, right this is what thecentral bank looks at to make their decisionsso traders trade the high impacting ones very aggressively because a variation inthat data will lead to a repositioning of the central bank sentiment for theupcoming meeting.

Okay, so the key ones interest rates CPI, industrial production, employment numbers, GDP, PPI, retail sales okay they create market volatility andspecifically, currency direction for the currencies, they give the currencies immediate bias and direction.

But not all the economic data is the same, there is a general hierarchy right the interest rate decisions from the central banks are atthe very top, of course, you've got the Consumer Price Index, historically thecentral banks have used the CPI or inflation to determine whether they'veraised rates or dropped rates, in this day and age they are now looking towardsemployment and average earnings as two extra indicators to make those decisions because inflation has been so weak for somany years.

GDP numbers it's a big heavy hitting number, it's the overall healthcheck of the economy's, retail sales a key component of consumer confidence and spending, unemployment rate obviously a massive component of the whole economic structure, any sort of weakness in unemployment goes into, should go intoweaken further retail sales and inflation etc and then you've gotoverall consumer confidence okay, now that can be sort of quitefluctuating especially around major geopolitical events but it is anotherkey component for some of the big economies.

So, back to the economic datareleases, they create immediate bias, as I mentioned earlier the central bank's rightthey tell you, we are looking at these specific numbers and if itincreases or decreases we will do X, Y or Z, they tell you exactly what they'regoing to be looking for, so when these numbers come out, and there is variantsstraight away in the number, okay the currencies move very aggressivelybecause they act as though that would mean an interest rate cut if the numberis weaker, and the CPI flash estimate for the Euro it's weaker than forecast thatwould mean a potential ECB cut or negative sentiment so the Euro drops offand traders sell aggressively, and this is the same for all the major currencypairs and that's why the economic numbers the fundamental drivers are soimportant for all this.

Now, I don't want to get you confused with this.

Now acurrent bias in the market, right there's three major sort of types of bias, you'veeither got upwards movement, okay upwards bias, sideways bias, or downwards bias, okay now this is different to the overall trend, so what we understand isthere's a major component here these are the economic numbers, the economic numbers will create the short-term bias but the longer-term trend okay, that will come from thecentral bank, in this example here we've got the Aussie Dollarwe've got the RBA they've got a Hawkish, positive sentiment in themarket, as I said the best trading opportunities are those where theeconomic numbers, actually go with that longer-term bias the longer-term trendset by the central bank.

It doesn't mean that there's not short-term tradingopportunities on numbers that are against that trend but just be awarethey are short-term trading opportunities, where are the longer termtrades? Well those longer-term trades are around the central bank announcementon interest rates, and then also data that runs with that sentiment, okay youput those two short-term bias and long-term sentiment together, that'swhere we get good trading markets and we make a lot of money very quickly, wehaven't seen a huge amount of them lately and that's why the US dollar atthe moment is so exciting because we've got a positive dollar sentiment, theFederal looking to raise rates we've got a new FED chair person (Jerome Powell)starting early next year and we get a whole new sentiment from them and it isquite a four-pitch so that gives us something to trade against especiallywith the majors because the US Dollar is the benchmark for most major currency pairs.

All right now, let's get into the where things get a little bit pear-shaped, okayand this is what we've seen a lot of over the last few years is majorgeopolitical events, drifting into the market they completely discombobulatethe technical side, as well as the fundamental side and the markets turnedto crap, right it's because of these issues, now let me just explain, sort ofwhat they are, well firstly, okay just understand that there actually can begood trading opportunities you can get huge moves, but around these things justunderstand, there's a huge amount of risk right, that's mainly associated becausewe don't know when they start, when they stop, who's saying things, and thevolatility increases, so, yeah there's a lot of cash you can make in these butjust don't go in with all your capital because you can get your arm bitten offvery quickly.

They're usually broad-based events, as Imentioned the U.

S.

is the major market or economy in the world so a lot of weirdthings coming out of the U.

S.

especially around Donald Trumpsince he's been elected President terrorism events are another majorproblem, then we've also got situations of global debt whether it's U.

S.

Europeanor just anywhere for that everyone's got a load of debt these days so theirbroad-based events and they can hit various markets now for instance the thegrowing U.

S.

debt has been an issue for some time now, and when it comes intofocus, okay we can see it impact the U.

S.

Dollar and the movement around that Dollar becomes quite erratic and hard to predict and that's when training does get alittle bit pear-shaped.

Also another good example of where things can gopear-shaped, UK exit from the EU otherwise otherwise known as Brexit, right this has been an absolute nightmare because, the announcementsunlike the economic data releases and the central bank announcements forthat matter, the announcements around these geopolitical issues are random, they are not forecast, not scheduled, we get random negative and positive remarks, and the currencies take off in all sorts of direction and you don't know wherethe flow is coming from, you get taken out of positions both sides of themarket, they are really not good for trading okay, I just want you to understandgeopolitical issues, you might think “yeah there's great big moves”, but they are a nightmare, and what happens is generally the normal flow of the majors inparticular, will break down, so you'll have a new situation where thefundamentals, you have traders buying U.

S.

Dollars and traders buying Euro, nowwhat is Euro against the Dollar do? Well it doesn't do anything, so the trade's sideways in a really erratic choppy fashion and that's what can happen when there arevarious geopolitical issues happening at the same time.

So currency direction isdefinitely not clear around these events because when you get these randomannouncements you don't know whether they're true, whether it's been confirmed, that the actual person said it, does it actually mean anything? All these variousthings you don't know when this starts and when it ends and that's a bigproblem for traders when these geopolitical issues pop up traders pullout, okay they stop trading in that weight and that's where liquidity gets a little bit illusive from thereso what we need to do? You need to follow the market, right if you want to be aprofessional trader and I know how much you want to go in there and start straight away, but you need access to the market, live real-time news, and I'm talking about economic data releases as well as the news itself, efficient trading systems that you can look across various markets, because mostof these markets are connected as well as the technical analysis, as I said thisis Reuters Xenith that I have a screenshot of, I'll show you this systemin a minute, it allows me to, to observe the market and check things out veryquickly and efficiently, and I know when I see things, what time it came out, because if you see a potential move, in the market and you didn't know when ithappened, well you can be getting at the in at the end of the move instead of astart of it, so the closer to the release especially on general news orgeopolitical issues, you need to know when that comes out and what the news isaround it and that's the way you sort of piece everything together, that's how youtrade.

Once you understand the fundamentals you will become anindependent trader and not need to rely on anyone.

So you combine thefundamentals, right the central bank's sentiment the economic data releases, andthen throw on top of that some of those geopolitical issues, if they are aroundand that's where you'll get the overall market sentiment as I said you take outthe geopolitical issues the central bank sentiment and the economic data shouldshould give us nice trending markets okay, but you've got to remember there'sthree components, consider all of them when you go to trade, Alright and that'spretty much it.

I'll switch over now to, to Xenith I want to give you a bitof a look at this and then if you have any questions, of course email us at info@traders4traders.

com or anyone on, as part of the membershipobviously jump into the 247 Trade Zone and you can ask your questionsin there, the fundamentals as you guys will be aware a major part of the course, and then a major part of the daily analysis that we provide through themarket sentiment and the charts every day, andthen sooner you get up the curve on this the sooner you're going to become anindependent trader as I said, and your profits will change dramatically.

Becauseyou'll be trading with the market, not against it.

Okay, now I'm going to takeyou over to show you Reuters and show you how the fundamentals work in the realworld, now this will open your eyes to a new product, new information it's goingto be quite exciting, just give me one minuteit's a $99 a month product it's the cheapest thing that you'll make moneyout of everything you'll buy probably in your lifetime okayit provides the direction and it also has the technicals in here as well but Iwant to show you is just how the market works how it connects to everything soyou've got general overall news here I've got a number of templatesalready set up, it allows me to read quickly through the markets so this oneat the top here is market news, it will give me details on the major currencypairs across all the markets for that matter but mainly on Forex the oneI've got set up, this one here will give me breaking news, any news thatflashes up or I've got commodity news here as well which is in thenews these days especially with regards Oil and Canada.

All right, so you comeback and look at a page like this I have templates built that will give mein-depth news and analysis around major currency pair, now I've just clicked on my U.

S.

Dollar template, now I'll put the news up there for all the news for the U.

S.

dollar news I can actually sort of review that for the week so I can prepare myself forwhen the major momentum shifts may occur I've got charts here I've got areal-time news there as well and if it comes up in the US dollar, it will pop upthere as well.

Okay, you can follow what you're not doing being able to do isfollow the market technically and fundamentally right whether it's generalnews or updates or give you a general rundown of when these economic datareleases are coming out what the real-time numbers are, right and that'swhere that short-term economic bias comes into play and it's very importantthat you understand is to become a professional independantsuccessful trader so they're going to be databases right if you'relooking at something like forex factory, daily FX, FX Street now then they've gotnice calendars and they do tell you what's coming out but the news is notreleased in real time, if you're like five seconds behind the news, it's tooslow, right so you need to get a service that actually does correspond with themarket and give you detailed description and analysis of what is going on.

Thenthe benefit of having this actually is as well – people sort of say “well where'sthe sentiment for the central bank's?” Right I can tell you where it isyou go looking for it you go shopping, okay, you will find out wherethe central bank sentiment is and I've got all the the various pages here, I can go and click into any of these and start to find more details around thespecific central bank's themselves, okay interest rates, the latest data releases, the target rate, inflation everything is here that you need to workout – is the US dollar going up or is it going down? Now you should be able towork that out pretty quickly, okay how this all works because once you've gotthe fundamentals it's very important to start overlaying the technical analysison top of that as I said, it won't take long if you go through the Pro TraderCourse, I'm just going to say, like just get your head into the market but gointo the Pro Trader Course go through the Central Bank sentiment andthe way they release their information as I said this is the key part of themarket that you don't want to be asking me a question in the trade zone as youget more successful you'll be able to see the announcement and trade it by, interest rate decision changes themselves are very easy right, butunderstand you need to sort of have a very good indication of what has beenfactored into the market so when the central bank does something if itdoesn't match up to the forecast you know what to do whether to buy or sell, and that's where you make a lot of the money.

Now if you're not that far upthe curve, well then you can come back to actually just trading the announcementslike ten minutes afterwards you don't to get in at the raw end of the releaseas I said there's a lot of volatility you can get a huge amount of the movesif you get in early, but if you don't know what you're doing, just wait, becausethe central bank announcements when they do change interest rates or policy forthat matter, it isn't just a one-day move it's a month move it sets you up for thenext four to six weeks and that's why you need to understand those, understanding economic data releases will they're quite simple that's allabout actual versus forecast, okay and the course will take you through thatin detail, you should work out very quickly where these opportunitiesare, but don't get fooled into thinking that you can just trade every economicdata release, because there's a huge amount of volatility and the high impactingones, and you've just got to make sure that you are going with sentiment, don't sortof second, don't second-guess it I was going to say but don't overthink it, andover trade the data, look for sentiment match up the data you trade it's simple, alright then last but not least, always keep aneye out for those geopolitical issues.

If you're reading my market insidereach day you will see that I'm a little bit bitter when those events pop up, and it's because they ruin the market they ruin the initial sentiment, we canhave for instance, we can have really nice Central Bank sentiment which is down for instance, it can emit numbers as week and then they get somecrazy announcement which sends the currency higher and blows everyone out, Ican tell the geopolitical events are a nuisance to all professional traders, andthat's why the Donald has been a bit of a pain in the backside since he's beenelected because he is a geopolitical storm, but he loves creating issuesbecause it deflects attention away from himself that's you know if anything madethe trade in a U.

S.

Dollar or a little bit harder, the U.

S.

Dollars the benchmark forall major pairs so trading has been a little bit sporadic, occasionally, becauseof the Donald, his influence over the markets themselves.

Alright sothat's the fundamental analysis guys, I hope this is that explained a lot of theintricacies as I said that the Pro Trader Course will give you more indepth detail.

If you're not sure about anythingsend us send us an email at info@traders4traders.

com or get onto the trial there and jump in the Trade Zone, ask us questions we're here to help we're here to make you a successful trader thanks for joining usand we'll see you again shortly.

Cheerio.