Forex First Grade: Fundamental Analysis I: The Players

FOREX FIRST GRADE: Fundamental analysis I: The players

Forex: A war of all against all
On the forex market rages an everlasting war of all against all. It's every man for himself, there is no moral high ground, no ethics and hardly any regulation. It's a capitalists' heaven and a communists' hell.

Everybody with half a brain, a lot of motivation and a willingness to work on their own state of mind (dealing with fear and greed) can fight themselves from rags to riches on the forex market. A couple of hundred dollars for a bankroll, lots of study, lots of practice, lots of discipline and you have all the basic ingredients for 'the road to the top'. It's not easy, mind you, but then again there's also no glass ceiling. Not enough diploma's / wrong school / too you / too old / too black / too white / too whatever, it doesn't matter. So what it comes down to is this: It's yours to loose.....

To be able to fight successfully on this eternal battlefield you have to know who your enemies are and what they think. I'll tell you one thing though, ' the market' is NOT the enemy; that's just a place that offers opportunities to make money. The enemy, the real enemy, is you yourself. Going against your better judgment, trading when you're frustrated, not monitoring your progress well enough etc. One thing is for sure, whatever happens when you trade, you are 100% responsible.

However, there are other 'enemies', namely the people/institutions that also want to make money, and for every dollar that one person makes, another person has to suffer.....


The Players
There are three major players in the forex market:
1) Governments
2) Multinationals
3) Traders big* (including obscenely big hedge funds) and small (like you and us)

Of these three players only the 3rd one is pro-active, meaning that he tries to predict the direction of the prices.

Governments mainly operate reactive on the currency market -through their Central Bank. For instance, to prevent the value of their currency falling/rising further when compared to others. Because it's getting harder and harder to really influence the forex market (because it's getting such a big market) the role of governments has somewhat decreased over the past decades. But it still happens on a reasonable regular basis that governments move in and start buying or selling massive amounts of currency.
A nice example of this is the Bank Of Japan (BOJ, Central Bank) , that, in 2003, spend over 300 billion dollars in a couple of months, to make sure the Yen stayed cheap when compared to the dollar. This to make sure that Japan's industrial production remained competitive compared to the US -because Japan's economy relies heavily on exporting goods.

Multinationals also play a mainly reactive role (hedge funds excluded, because they trade for profit). Companies like Shell, Philips, Microsoft etc have lots of foreign activities. To protect their foreign costs and proceeds from currency fluctuations, they 'hedge' them by buying/selling foreign currency.
For instance, a European company buying Euros and selling dollars (position: long the EUR/USD) to hedge against it's US sales. And multinationals also operate on the forex market because they invest, buy/sell in other countries etc, and need to exchange currencies to do so.

Why economic news is important.
Economic indicators give all kinds of hints about how a country is doing. And they also give insight into the needs of foreign and domestic companies.
Is a Central Bank lowering interest rates? That means that it will be cheaper to borrow the currency that Central Bank represents, so it will be cheaper to invest in the country of that currency. But because there will be more of that currency available (since it's now cheaper) it will also usually mean that inflation will go up, which in turn means the currency will decline as compared to other currencies.

Companies and governments are responsible for the (economic) news. This news has real AND speculative value. The real meaning will be determined by companies and governments, the speculative meaning will be determined by traders.

Traders big and small react on the news because:
a) The news tells something about how companies have operated over the past period and how they most likely will operate in the future. For instance, employ more/less economic activities in a country, so there is more/less need for hedging on the forex market.

Simple example: Has the GDP (Gross Domestic Product) of a country increased sharply? That means there will be a lot of demand for that countries currency. Why? Because everybody loves to invest in a country that's doing very well. So chances are the value of that currency as compared to others, will go up.

b) It tells them something about the probable reaction of the government/governments the news applies to.
Example: Did the inflation in the Eurozone increase to 5%? Then there is a good chance the ECB (European Central Bank) will increase interest rates, in order to deflate the money market and (hopefully) decrease inflation. The value of the Euro will -because of higher interest rates- most likely increase when compared to other currencies.

c) Other traders big and small ALSO follow and react to the news. This might very well be the most important reason why traders react to the news: the expectation others will react to it too. After all, it's a war of all against all, so if everybody else decides it's time to start buying Euros and selling dollars, you better start doing that too....

Almost all successful traders keep a close eye on the economic events that get out. To quote a very successful trader, asked what he thought was most important, fundamental or technical analysis: ' This is like asking a doctor whether he would prefer treating the patient with diagnostics or with a chart monitoring his condition. You need both.'

Next we'll look at some of the most important subjects in fundamental analysis.



*As far as the actual execution of trades, banks are by far the largest players. However, that execution is mostly passive. Banks do speculate themselves as well, and in that respect they fall into the category 'traders big and small'.