1. Integrate Multiple Indicators into a Composite "Fundamental Score"
Select 3 to 5 key metrics - macroeconomic surprises (e.g., CPI, GDP), parity deviations (PPP, IRP gaps), and external flows (current account, CFTC positions). Convert each metric into a Z-score and assign weights (e.g., 40% for surprises, 30% for parity, 30% for flows). Calculate the overall fundamental score by summing these scores. Define thresholds (±1.5) to indicate bullish or bearish Sentiment.
2. Combining Fundamental Analysis with Technical Analysis
Overlay the fundamental score onto basic chart patterns such as trendlines, horizontal support/resistance levels, or moving averages (e.g., 100-day moving average). Trade only when the fundamental score crosses a threshold and the price touches a technical indicator. Set a stop-loss at 1xATR (average true range) and a take-profit at 2xATR.
3. Keeping a Journal of Fundamental Data
Record each trade date, currency pair, fundamental analysis score (including key drivers), entry and exit points, profit/loss (P&L), and briefly note the date of relevant data releases that influenced the score. Indicate whether the price moved in the expected direction. Review trades regularly (e.g., weekly) to identify successful indicators and adjust trading strategy accordingly.
* Additionally, it is recommended that you read "Foundations of International Macroeconomics" by Obstfeld and Rogoff in order to gain a deeper understanding of the concepts behind the International Real Interest Parity (IRP) and Uncovered Interest Parity (UIP) models, as well as the Dornbusch overshooting model.
