Common Practices Used by Fundamentalists

Figure Deviation

A common practice used by short term fundamental traders (or more accurately news and event traders) is trading based on the deviation of an economic indicator actual figure vs. the expected figure.

When economic figures are to be announced, usually 3 numbers are shown:

Previous, expected (also called consensus or forecast) and actual figures.

Previous Figure:

                        The actual figure of the previous period (usually the previous month).

Expected Figure: 

                       What experts think the figure should come out as. Usually and average is made between say forecasts of 20 experts on the field.

Actual Figure: 

                     The actual number of the figure.

What news and event traders focus on is on the last two figures: the expected and the actual figure. The more the deviation the actual figure has from the expected value the more the impact it should have in the exchange rate.

Carry Trades

Most fundamentalists trade the currency market for the long term. This is because most of the time changes in supply and demand take longer to be reflected in the charts.

Carry Trades or Rolling over is a common practice that consists of taking advantage of the interest rate differentials between two currency pairs. Most of these trades have a long-term span. Aside from taking advantage in the currency pair movements, they also benefit from buying a high yield currency and simultaneously selling a low yield currency or selling a low yield currency and simultaneously buying a high yield currency. This way, traders are paid an interest or roll over.

Equity Market Correlation

When a given equity market offers greater returns than other equity markets, it is common that fundamentalists buy the currency of the equity market that offers greater returns.

This is because investors around the world will see benefits by investing in that country. As the sentiment gets better, that currency will increase its demand, pushing its price up.

Going long, Going short

The basic idea of trading the markets is to buy low and sell high or sell high and buy low. I know that probably sounds a little weird to you because you are probably thinking “how can I sell something that I don’t own?” Well, in the Forex market when you sell a currency pair you are actually buying the quote currency (the second currency in the pair) and selling the base currency (the first currency in the pair).
In the case of a non-Forex example though, selling short seems a little confusing, like if you were to sell a stock or commodity. The basic idea here is that your broker lends you the stock or commodity to sell and then you must buy it back later to close the transaction. Essentially, since there is no physical delivery it is possible to sell a security with your broker since you will ‘give’ it back to them at a later date, hopefully at a lower price.
• Long vs. Short
Another great thing about the Forex market is that you have more of a potential to profit in both rising and falling markets due to the fact that there is no market bias like the bullish bias of stocks. Anyone who has traded for a while knows that the fastest money is made in falling markets, so if you learn to trade both bull and bear markets you will have plenty of opportunities to profit.
LONG – When we go long it means we are buying the market and so we want the market to rise so that we can then sell back our position at a higher price than we bought for. This means we are buying the first currency in the pair and selling the second. So, if we buy the EURUSD and the euro strengthens relative to the U.S. dollar, we will be in a profitable trade.
SHORT – When we go short it means we are selling the market and so we want the market to fall so that we can then buy back our position at a lower price than we sold it for. This means we are selling the first currency in the pair and buying the second. So, if we sell the GBPUSD and the British pound weakens relative to the U.S. dollar, we will be in a profitable trade.
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