Judul Konten
We understand how powerful knowledge can be when it comes to trading in the vast financial markets of today. It is the one thing that all successful traders have in common. You can think of it as the foundation upon which you build your fortress. It is with this solid foundation that you will be able to build the knowledge structures and trading habits that will contribute to your success as a trader. No matter your choice of financial market, trading vehicle or asset, having a good grasp over the core tenants of the markets will only benefit you. In this section, we will explore a method of market analysis you will be able to use throughout your journey in the financial markets: news trading.
News trading, commonly referred to as fundamental analysis, takes into account factors such as geopolitical news events, the reading of market sentiment and economic indicators when it comes to helping traders make informed decisions in the financial markets. The root of this principle is the fact that, at any point in time, assets are either overvalued or undervalued, and are continuously in the process of correcting themselves and moving towards their true value. News trading is employed to establish what this true value is, thus allowing traders to capitalise on an asset’s rise or fall towards it. It is because of this reason that news trading is so focused on external events. The core belief is that events affect sentiment, and sentiment is what drives markets.
Market research is central to news trading as all information that may potentially reveal more about an asset’s true value (in other words, the direction in which the market is likely to head) is immensely helpful. This is why news trading is so concerned with looking at the external factors which affect the market price of assets. These external factors come in the form of geopolitical news (natural disasters, global conflicts), market news (bankruptcies, mergers), economic indicators (Gross Domestic Product figures, employment reports, interest rate decisions) and the reading of market sentiment. Let us now take a look at a number of these external factors and explore the role they play within the financial markets.
Judul Konten
Geopolitical events consist of both geographic and political factors. Geographical factors are factors concerning the natural features of the world and the global population. Political factors are factors related to policy or systems of government, often taking into account political parties and the relationships between states or countries. Both geographical and political factors play a role in influencing or delineating a country or region, which allows them to be used in the analysis of economic performance. In turn, this allows us to predict the future performance of tradable assets within the respective countries or regions. The following are examples of geopolitical events which can be used in fundamental analysis:
Judul Konten
Disasters, both of the natural and manmade sort, have a profound impact on the financial markets. They interrupt the lives of people living in the affected regions and introduce disruptions to their daily lives. Additionally, disasters have the tendency to damage (or, in the worst case, completely destroy) infrastructures which are essentially the backbones of economies.
One example of such a disaster was the explosion of an oil rig that British Petroleum (BP) was renting in the Gulf of Mexico in 2010. Every day from the point of the explosion, thousands of barrels of oil were leaked into the ocean. Not surprisingly, BP stocks plummeted, leading to the company losing approximately $25 billion worth of market share. This falling of BP stocks is not the only negative impact of the oil spill.
Property values in the region also took a huge plunge. The falling property values affected not only the coastal regions close to the oil spill, but also those farther inland. Fisheries along the 635 miles of coast tainted by the oil spill suffered the most, leading to a considerable knock-on effect on housing and employment in the region. As a direct result of the BP oil spill of 2010, an estimated 22,000 jobs were lost.
The impact of this disaster had more than short-term effects. The oil spill would carry on to have a social stigma attached to the purchasing of property within the nearby vicinities, which played a part in the falling property prices of up to 15%. The estimated total cost of the BP oil spill for the economy of the region was approximately $8.4 billion with subsequent negative implications for both the GDP of the US and the value of the US Dollar.
Judul Konten
What probably impacts the value of assets more than anything else is the presence of war. The conflict does not even have to be taking place at the current moment–even the suggestion of war in the Middle East is enough to trigger an exponential rise in the price of crude oil because of the fact that the region is such a large player in the oil industry, it being a major exporter.
Why do the prices of crude oil increase sharply during these times of war? The answer is simply supply and demand. The oil fields in areas of conflict show a decrease in production, or a complete cessation of any production at all. This leads to a decrease in the supply of crude oil in the market, which, as a consequence, leads to a rapid rise in its price.
In addition to the prices of crude oil rising in the Middle East during times of war, the stocks of military equipment companies and weapons manufacturers can be expected to increase as the region prepares for armed conflict. Like the movement of crude oil prices, the stocks of military equipment companies and weapons manufacturers are influenced by changes in supply and demand. This creates a domino-effect where the raw materials that are needed to product the military equipment also see a rise in demand, and thus value. As a consequence, the stock prices of the mining companies responsible for extracting the raw materials used for the production of weapons can also be expected to rise.
Judul Konten
So far, the two aspects of news trading we have looked at, geopolitical events and economic indicators, have a clear cause-and-effect dynamic, where you can easily pinpoint how and why the events that happen result in movements in the financial market. Market sentiment, however, behaves rather differently. Studying the impact on the financial markets market sentiment has tells us that data alone does not influence price movement and supply and demand. It may be surprising for some to learn that markets react much more vigorously to sentiments caused by intangible happenings like speeches and televised conferences, rather than a cold, hard data release on its own. In the following paragraphs, we will learn just how impactful market sentiment can be, and how exactly you can use this to your advantage as a trader.
Judul Konten
So far, the two aspects of news trading we have looked at, geopolitical events and economic indicators, have a clear cause-and-effect dynamic, where you can easily pinpoint how and why the events that happen result in movements in the financial market. Market sentiment, however, behaves rather differently. Studying the impact on the financial markets market sentiment has tells us that data alone does not influence price movement and supply and demand. It may be surprising for some to learn that markets react much more vigorously to sentiments caused by intangible happenings like speeches and televised conferences, rather than a cold, hard data release on its own. In the following paragraphs, we will learn just how impactful market sentiment can be, and how exactly you can use this to your advantage as a trader.