September 07, 2017
Fundamental Analysis is one of the most revered and respected ways of analyzing the forex market, and whenever somebody mentions “fundamentals”, they are referring to the economic information about the country associated with a currency. You’ll see that fundamentals can cover a wide range of forces on a currency’s price, deriving from economics, politics, or even the environment.
The process of fundamental analysis involves studying all that information and using an analysis of known fundamental forces to predict what will happen in the future price of a company’s currency.
Fundamentals require a study of the entire world around us, including factors such as employment figures, inflation, interest rates, the political climate and economic growth. Anything with a large enough impact to affect a currency price is considered a fundamental force.
Fundamental analysis can give investors ideas about how a currency price could change based on certain economic events. The fundamental data that supports trading decisions can take many forms.
This data could, for example, be a report about a country’s home sales, or it could be a policy change made by a large country’s bank. Many times, the economy shifts simply from the release of information like this — and when investors react, the economy can change whether the information released is true or not. In fact, often changes take place before a report is even released when traders expect a report to say something specific.
Fundamentals Can be First
When it comes to interest rate changes, many fundamental investors can estimate interest rate hikes days before an actual statement is ever released. Currencies have even been known to jump more than 100 pips moments before a major event takes place – which makes for a profitable time to trade for fundamental traders with the correct training and software.
That’s why many traders keep up with current events and get ready for fast moves just before certain economic information is released!
Most of the information used for fundamental analysis comes from economic indicators. Just like a smoke alarm that goes off at the first sign of a fire, a company’s economic indicators provide clues to how well its economy is doing.
While it pays to understand the value of an indicator, it is just as important to understand the market’s anticipation and its guess at that value.
Before you even think about trading, you have to take in account how the actual figure is going to affect the predicted one.
Try not to worry about it, the whole process is much easier than it sounds, and you don’t have to be a brain surgeon to understand it.
While fundamental analysis is a great tool to guess at what the future economic conditions of a country are, it isn’t very good for predicting a change in price direction. The fundamental information isn’t specific enough, and you will get a much better idea just by looking at technical indicators.
Fundamentals Analysis is About Feelings
The forex market will react more to how people feel than it will to anything else. If people feel strongly about a particular report, the market is likely to be very volatile that day.
Because different traders have different interpretations of the market, it can become difficult to predict how the market is going to move. That’s why there is a huge amount of uncertainty in fundamental analysis, and why you need technical analysis to fill in the missing pieces.
Many traders have a hard time figuring out how to use the huge amount of information that is out there. It can be difficult to factor all of that information into economic terms and figure out how it is going to affect the price of the currency. Don’t forget that there are two currencies in every pair and that to get the best results, you have to look at the information for both countries involved.
Long term and medium traders benefit more from fundamental analysis than they do from technical analysis. That’s because they can follow long term changes in a country that would not affect the prices of a currency pair in any one given day.
Short term traders prefer to focus on technical analysis because short term strategies can predict short term changes much better than fundamental analysis.
Surprisingly, the best solution may be to use both Technical and Fundamental analysis!
If you focus purely on technical analysis, your strategy will be crippled when a large economic event occurs — especially an unforeseen one. At the same time, fundamental analysts miss out on many short term opportunities that technical analysts profit from routinely.
You may find that a mix of technical and fundamental analysis covers all angles. You’re aware of the scheduled economic releases and events, but you can also identify and use the various technical tools and patterns that market players focus on.
By practicing both types of analysis, you will cover all of your bases. You will miss out on far fewer opportunities and possibly make much more money.
Test Your Knowledge: Fundamental Analysis
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Question 1 of 3
Factors such as employment figures, inflation, interest rates, the political climate and economic growth play an important role in which type of trading analysis:Correct
Question 2 of 3
Most of the information used for fundamental analysis comes from ____.Correct
Question 3 of 3
There is a huge amount of uncertainty in fundamental analysis, and why you need technical analysis to fill in the missing pieces.Correct