Section VII: Common Practices Used by Fundamentalists
Important note: This section is not intended to show fundamental systems, but a part of a given strategy.
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.
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.
The pairs and cross-pairs most commonly used for this practice are:
(INCLUDE LONG OR SHORT)
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.