 Hi, my name is Leon Rowe, currency trader and trading coach at Trading180.com and welcome to this video on how to generate a fundamental trade idea in Forex and why would you want to do that? Why would you just not want to just make your trading decisions and base your trading decisions on technical analysis? Well, you can do that if you want, but if you really want to learn how the financial institutions trade as well as increase the chances of you having a successful trade and learn to hold trades for a lot longer for hundreds and thousands of pips rather than being scared out on, you know, pull backs which are a natural part of price movement, then this is the video for you and this is really for swing traders, day traders. You trade those lower time frames and you have to get in and out, you know, at the end of every day. This is probably not going to be for you. So if you're a swing trader and you do want to, you know, hold trades for hundreds and thousands of pips over, you know, a few weeks to a few months and really understand where direction of price is going in the potential future in the medium to long term and I'm going to give you some chart examples. Then this is videos for you. So stick around. When developing a trade idea, it's essential to really ask the question about where is the money going? Typically, money flows into different assets depending on what's happening in the market at the time as far as, you know, the trading environment. So we all know the mantra, buy low or sell high, but we need to understand the value of what we're buying and what determines value. So an example of that, whichever one can kind of relate to is hand sanitizer. Hand sanitizer is value before the coronavirus was something like 99 pence, 99 cents, whatever, wherever you are in the world. During and we're actually currently in this coronavirus pandemic, the cost of hand sanitizer has gone up because of scarcity and demand. So that scarcity and demand has pushed the value of hand sanitizer up. In forex, value is determined by gross domestic products, interest rates and inflation and the relationship between those three main macroeconomic data points. We also have risk of sentiment. So risk of sentiment is when the environment changes and there's a lot of uncertainty in the market. So again, going back to the coronavirus environment that we're in, which is affecting countries all around the world. In fact, it's affecting the whole world. We are in a risk of environment because there is a lot of uncertainty in the market. Now, when there's a lot of uncertainty, money will flow from into certain assets and out of others. So what are those typical assets and where does money flow in a risk-on environment, which is basically when fundamentals and everything is okay in the world, to a risk-off environment where there's a lot of uncertainty, fear, a lot of doubt in the market. So typically what will happen in a risk-on, so risk-on when everything is fine in the world, so risk-on, money will flow into higher yielding assets. So higher yielding assets in the forex world, it's an asset that has potentially a good interest rate. So interest rate percentage, but this is also determined upon the interest rate cycle, whether they're hiking, holding or cutting as well. But usually higher yielding currencies. Again, it will go into GDP. So GDP, a country that is going into the expansion, the recovery expansion and boom phase of the economic cycle. So what you have is economic cycles are like this, where you have boom, you have contraction, you have recessions, you have bust or slump, then you have recovery, then you have expansion, and then you have the boom phase again, like that. And then there's an economic cycle when it goes back to contraction, etc. That's what tends to happen. So a country's GDP, wherever they are in their economic cycle and the business cycle, will determine the potential value of their currency as well as inflation as well. Inflation is basically prices. So if inflation is high or low, that will determine whether the central banks have to increase or decrease their interest rates. So typically this is what happens when money will flow into the best currencies and then it will flow out of the worst currencies. Also what will happen is those currencies in particular are commodity currencies like the AUD, New Zealand dollar and ZD, the CAD as well, because their currencies are linked and their exports are linked to commodities. The Australian economy is linked to things like copper, coal briquettes, gold as well. New Zealand is a lot of dairy and meat products commodities and the CAD, their main export is oil. So these are known as the commodity currencies. In a risk-on situation, away from Forex, they'll go into stock market, sorry, CK. Stock markets tend to go into oil as well. If we have global expansion, it means that there's a lot more transportation, a lot more oil is going to be used, a lot more demand for oil. So depending on what OPEC does, if they reduce the barrels or what they're producing and there's more demand, the prices of oil should go higher. So that's where money will tend to go into when risk is on. And by the way as well, US dollar as well is one of those currencies when risk is on at the moment, typically because it was doing better before the coronavirus than the majority of the other major currencies. Now in a risk-off situation where there is a lot of uncertainty, risk-off, risk-off. Money will flow into safe haven currencies like the yen and the Swiss franc and sometimes the dollar as it's seen as the world's reserve currency, you will get money going to gold and silver, I-L-V-E-R and you will have money flow into things like government T bonds, government treasury bonds as the T bonds and bonds are backed up by the government and are seen as a safe play to put your money as it's guaranteed by the government which is basically taxpayers. So that's where money will go into. So in a risk-on situation, money will go out of here and into risk-on assets and in a risk-off situation, money will go into these and out of the risk-off assets. So in a risk-off situation, currencies like the AUD, NZD, etc. will suffer in a risk-off situation. So money is flowing from one place to the other. So if you know what happens typically, depending on the environment you're in, you can then start to generate trade ideas depending on what's happening and the environment. So one of the typical trade ideas that we trade in the forex market is, as I alluded to in the last slide, is divergence. So what is divergence? It's looking for the difference in currency and central bank policy. So let's say, for example, you have a country like, for example, the EU or Europe that are going into a potential recession. Germany is crashing. Italy, France, Spain, they're all doing terrible economically and all heading potentially into a recession. And on the other side of that, you have the US dollar who are growing. GDP is at an all-time high. You're creating lots of jobs and everything is brilliant in the US. Where do you think the money is going to go? Investment is going to go into the US. It's just a no-brainer. If you're an investor and you've got tens or hundreds of millions of pounds at your disposal and you want to invest your money and create jobs, etc., where are you going to invest your money in an economy that is heading into a recession or an economy that is going into the expansion phase and the boom phase just makes sense for you to invest in the stronger one. Again, so there's a divergence between where they are from a gross domestic product perspective and it's the same thing with interest rates. Sometimes it's not about where the highest interest rate actually matters where you are on an interest rate cycle. An interest rate cycle looks like this. Now, typically in a recession, what will typically happen is you will get interest rate cuts and in the boom phase or expansion phase, you will get interest rate hikes. Now, if you don't know why, again, I have the free course. If you go to trading180.com, sign up for free and in that course, not only will you learn about supply and demand, you will learn about fundamentals and the basics of fundamentals and the relationship between GDP, interest rates and inflation. And then you've got the holding. So that's when central banks are happy with where they are when it comes to inflation. The inflation target is 2%. So the further you go away, either below or above, will determine whether central banks will tend to either cut rates, or hold or hike. And like I said, typically hiking comes with an expanding economy, boom phase, expansion phase, recovery phase and central bank cuts, which is what you're seeing right now with the coronavirus. You'll see in the central bank of England, you'll see in the Federal Reserve, the Bank of Canada, central banks pretty much all around the world are cutting because they want to avoid the session, which is probably unavoidable at the moment. So divergences in interest rate policies, there's no divergence if both, for example, the EU, Europe and the United States are cutting rates, is that a trade idea that you want to trade? So you might have to look for a divergence in something else. There's divergences in GDP, divergences in interest rate policy, divergences in inflation. So you might get all three, you might get two, you might get one, you might get none. So it depends, that's what we need to see. That's how we generate our trade idea, by looking at what's happening potentially or what's going to happen potentially and seeing divergences in these macroeconomic data points. The carry trade, so the carry trade is also a trade idea where what traders will do typically is they will borrow a currency who has a very low interest rate, for example, Europe, and they were there, I think they're still there. And before the coronavirus, pre-coronavirus and the dollar side, interest rates were actually quite high. So I think right now they're at 0.25, but before they did that, before they cut to 0.25, it was actually at 1.7. Oh, 1.25, sorry, apologies, 1.25%. So they cut by one basis point recently. So what typically happens in a carry trade is that investors will borrow this, 0%, and put it into a higher yielding currency. So borrow for practically nothing and get back 1.25%. So this is where the money is going. That's what you call, as what's known as the carry trade idea. And again, in this time right now, the carry trade idea is probably non-existent because all central banks are pretty much cutting rates and they're all pretty much very, very similar, very, very low. And again, I'm going to be showing you some charts of these trade ideas. So risk off, which is basically what we're in right now, risk off. Now risk off can be divided up into local and global. So local would be, for example, an election. Global would be, for example, the virus and to a certain extent, the trade war as well. That would be more global because China are the world's pretty much economic engine. And if what happens in China, as the saying goes, if China sneezes, the whole world catches a cold. So anything that hurts China and their economic progress or slow down, then that's pretty much going to be a global idea. So, for example, a local trade idea from a risk off perspective would be an election. When there's uncertainty about which party is going to get in, if it's a party that is maybe pro-finance, pro-bankers, et cetera, then excellent. If it's a government that is maybe tax the bankers, drive them away, et cetera, et cetera, then that's not going to be good for that currency investment, et cetera. So that's another trade idea. Brexit was a trade idea. And which currencies did it affect? It affected GBP and the Euro. So if you were a trader, if you were a trader, what currencies would you look towards trading Brexit or as far as trading against the pound and uncertainty with the pound and uncertainty with the Euro? Well, in a risk off environment, we already know that risk off currencies, a JPY and CHF. So those are the risk off currencies. So then what you would do is pound yen by the yen short the pound, by the yen short the Euro, by the Swiss short the pound, by the Swiss short the Euro. That's it. And that's how a simple way, a really kind of simple way of developing a trade idea first because we know where money typically goes into in a risk off environment, which is the yen and the Swiss franc. And we know that there's uncertainty about how Brexit is going to affect Europe and the UK when it comes to their economic standing. So it's a no brainer then to then go to a price chart and then look for the trade direction, look for those trade pairs, look for supply or demand zones in the direction that you want to trade. That's how we develop trade ideas. So let's look at, for example, how certain trade ideas over the years have panned out and how you could have made hundreds if not thousands of pips. So in 2018 and into 2019, most of 2019, there was a trade war between the US and China which really did escalate and it was seen as a really like a massive risk off event because again, two of the world's biggest economies put in tariffs on each other and there was a lot of uncertainty around how tariffs were going to affect the global economy. We were in a risk off situation. So it really started before July 2018 and as far as talks, I think from what I remember, I remember reading about the potential trade war in Havana about February, March of that year and obviously it started escalating. That's when the tariffs actually were ticked for tax, et cetera. So that was a risk off situation. Now, what currency do you think or currencies do you think or assets pretty much could have taken advantage of that? So one of the currencies that really isn't spoken about but would have been an obvious choice is the Australian dollar, Japanese yen. And again, because in the previous slide I said that in a risk on situation, AUD will tend to do well as it is a commodity currency. In a risk off situation, the JPY is the currency to buy in uncertain times. What happens with the commodity currency especially with the Australian dollar? The Australian economy is heavily reliant upon selling their goods and providing services to China. So if China slowed down, one of the economies that's going to be heavily affected is the Australian dollar, right, an Australian economy. So from really from the beginning of 2018 which is again where these talks were starting to happen China potentially slowing down the trade war look at pretty much what has happened. What has happened and we've gone from one risk off scenario to another. So from trade wars to the coronavirus and really the coronavirus has really started at the beginning of the year and again look at what has happened. Risk off has pretty much been lasting on. It's been to varying degrees risk on. It's not necessarily a light switch. It's not risk on or risk off. It's varying degrees of risk. But overall we've been in a risk off situation lot of uncertainty around global growth and now the virus is also affecting global growth. So the yen was the one to buy and the Australian dollar was the one to sell and that trade idea lasted for and has still continues to last for two years. If all you did was just get short at supply zones pullbacks would you have won every trade? No, nobody wins every trade. But the money was made to the downside. The money was made on pullbacks and getting short. Yes, there would have been opportunities to get long but from the highs to the lows potentially there was about 3,000 pips to make in various points on the price chart. So for the past couple of years we've had a divergence in GDP growth from the US and Europe. You can see that especially in 2019 we've had some decent growth, 3.1%, 2.1% into 2020 and so when we look at the growth compared to the Euro area Euro area has been very, very weak 0.5%, 0.1%, 0.3%, 0.1%. So there's a divergence in growth in gross domestic product between the US and Europe and how does that look like on a price chart. So if you were looking at 2019 and looking at the divergence between GDP and using that as your baseline trade idea areas to look for short trades right there, 2019. Pips potential from the 2019 highs to the lows just holding that trade around 793,800 pips to the downside and I'm saying that you should hold one trade for the whole year but there was definitely enough the money was to the downside that's where the trend was that's where the big moves were the bigger moves were yes, there were periods where you would look for pullbacks but at each pullback what you would do is just look at that as an area to potentially get short. So again, fundamentals and trade ideas if you can develop a trade idea and understand why price should want to either go to the upside or to the downside over a certain period of time fundamentals don't change everyday macroeconomic data doesn't change every single day GDP countries don't go from a recession to the boom phase in a matter of weeks or even a month or two remember for a recession to be economy to be in official recession you need two quarters of negative growth so minus 0.1 negative growth two quarters would be six months and the average recession they say lasts between a year and a half to two years so if you had a country that was going into a recession or that was in a recession you know for at least typically on average for the next year and a half or at least a year you should want to I don't know why my writing is slanted like that but you should want to short that currency and then find a country and an economy that is booming or in the expansion phase or the recovery phase of the economic cycle again a divergence divergence in economic cycle and this is what's happening in fact let's look at one more let's go to somewhere like let's look at gold and what's been happening with gold so gold demand trend full year and fourth quarter of 2018 this was published on the 31st of January 2019 central banks demand for gold soared to a multi-decade high in 2018 so they were literally buying gold why were they buying gold? they obviously saw that the economy and the world economies were going into there's going to be a lot of uncertainty coming these are the smartest guys in the room when they talk you should listen they are not basing their decisions on a pinball at a level of support or resistance they are doing the fundamentals so a trade idea if you read something like this and you're a gold trader and the central banks are buying then what should you have been doing? what should you have been doing? you should have been buying gold you should have been buying gold 2018 here of course there was a little bit of a dip in that which allowed the central banks to buy for cheaper but during 2018 especially at the beginning of 2019 and reading that article there if you were buying look at pretty much what was happening and what happened again it was backed up by uncertainties in the trade war now the coronavirus nice buying opportunity down here excellent to the upside there we are that's just a nice pullback for the central banks to buy for cheaper right there so with that being said generating trade ideas is what really you should be doing before looking at a price chart and then look to the price chart in order to time your entries and determine if you're buying at the high or if you want to be buying on a pullback and buying on pullbacks in that lows are where the best buying opportunities are but you will never determine that through price you can only determine that through trade ideas and generating trade ideas and as long as you know where money typically goes in an environment then you can just you know trade that trade idea anyways guys my euro dollar alert is going off and I will see you guys soon any questions please email me at info at trading180.com don't forget to sign up to the free course on the website learn to trade, supply and demand as well as fundamentals as well alright take care and speak to you soon so with what I'm saying resonates with you why not check out trading180.com there is a selection process to trade my supply and demand zone forex strategy I'm only looking to work with individuals with the right mindset you know who are hard working as well so check that out and access really for less than one pound a day some of the strategies in here are not for beginners so if you don't know what supply and demand is please check out all of my supply and demand videos I have hundreds of videos on youtube so you can check that out first guys take care and until the next video have a good one