Include Fundamentals into your Trading-Win More

Hey there! I hope your week has gotten off to a marvelous start like mind. For the trading and investing nerds or just anyone interested in financial markets, this article is for you. If you're not interested in finance and still wish to read on, then be my guest. 

I have written about this topic before but with different financial assets. Here, I want to illustrate the importance of understanding macroeconomics and factoring it into your trading with the help of the Australian dollar vs the Canadian dollar (AUDCAD). I have no affinity for this pair and just wish to show how a certain trader lost a trade by not following the news about Canadian consumer price index (CPI) on the 27th of June, 2023. 

While scrolling through my facebook feed, I came across a post by a trader seeking to understand why his trade hadn't played out despite aligning with his smart money concept  trading style. Below, you can see how it played out.

What's wrong here? was his question. The answer is simple. From the next image, you will see that Canadian consumer price index printed lower than expected. I know some traders like to follow a consensus that says bet against a currency whose  data comes out red (or below market expections) and vice versa when green. This works many times and sometimes it doesn't like I explained in my last post about using fundamentals in trading. So going back to tha trader, we can see that he got stopped out and took a loss (I hope he was not over leveraged).  

When inflation is above 2% (for advanced economies), the central banks of those respective countries  will seek to bring back inflation to their 2% target. The thing is, Canada and most major ecoomies beginning 2022 have been raising interest rates aggressivly so as to bring inflation under control. When  central banks begin to see and think inflation is going to where they want (2%), then they will decide to start stepping back from raising interest rates further. Before this unfortunate day for our fellow trader, the Bank of canada had signalled that they will pause with rate hikes and that a decisoion to hike rates furtherr will depend on incoming data. Based on this, you can see from the following figure that CAD cpi came out below expectations and since the market already understood that the Bank of Canada will at worst keep rates steady, this caused the Canadian dollar to sell off after the news. Simply put, if any central bank is raising rates, then the curency of that country will appreciate againts its peers. Same as if a central bank signals cutting rates or even pausing, that currency depreciates against its peers. This is what happened with the Canadian dollar on June 27 2023 and our friend lost his money.

I'm not saying trade fundamentals but rather that trading is a game of probabilities and wouldn't you want the odds stacked almost completely in your favour? If yes, then what is stopping you from incorporating just a little bit of fundamentals? If our friend understood this, he will definitely not have lost. The economic calender is there for a reason and I say use it. Understand what those economic factors mean so you can use them appropraitely and successfully. 

Day to day fluctuations are not that crucial for investors but understanding these data, reports and speeches as shown on all economic calenders are indispensable. One example will still be about central banks raising interest rates to counter run away inflation. We could all see the stock market doing exceptionally well in 2020 (even with lockdowns) and 2021 as we experienced a wonderfull bull market (long up trend). Indices like the S&P 500, NASDAQ  and Dow Jones Industrial Average all rallied. This was same for other financial assets like Bitcoin and every other crypto currency. The Federal Reserve (United States Central Bank) kept interest rates at exceptionally low levels as inflation was also low. This meant markets had a ton of cash flowing into it. The complete reverse occured in 2022 when inflation hit double digits in most economies and interest rates began going up. This is how you can simply apply economic factors into your trading.

To conclude, I hope you now see and know how to act when next you see the consumer price index (CPI) of any country. This is by no means financial advice and you only act on it based on your own convictions. I personally go to the website of the Central bank whoose CPI is due and read what they have been saying  before. In this way, I know what to do when its time.

On that note, I rest my case.