We believe that a mixture of fundamental and technical analyses in Forex brings the best results. Today, we present to you fundamental based trading guide.
AtoZForex – Fundamental analysis in Forex is a type of market analysis that is based on the examination of the economic forces of supply and demand and economic health indicators of the certain country. Moreover, things like change in the interest rates and political disturbances all fall under the fundamental analysis’ umbrella.
Today, we talk about fundamental analysis, its specifics, and the difference between fundamental analysis and news trading. We present to you a complete Fundamental based trading guide.
What is fundamental analysis?
First, it is necessary to mention that the fundamental analysis is the oldest school of analysis. Fundamental analysis has emerged in times of Lydians and Persians, since the beginning of economics. Some century ago, there was only fundamental analysis, yet there were a lot of self-made millionaires-traders. In fact, the technical analysis has appeared only in the end of 19th century.
Fundamental analysis is aiming to forecast the market movement based on the economic releases and news. The fundamental analysis looks into such factors, as macroeconomic conditions in the country of currency origin or the global market environment. Moreover, the currency moving factors can involve social, economic, and financial stance of the country of origin. Each of the major currencies is affected by a certain set of factors since each currency has its peculiarities.
Furthermore, fundamental traders focus on the most powerful forces behind the price movements. They normally base their trading strategies on these patterns. Just some days ago, I was discussing the key fundamental drivers of the major currencies. We went through the USD, EUR, GBP, JPY, CAD, CHF and the factors behind the moves of these currencies.
As a fact, various factors of influence will have different importance for the fundamental analysis. For instance, back in 2008, market experts would expect the Russian currency Ruble to appreciate as a result of higher oil prices. That time, commodity prices were the most significant driver of the prices. Yet, in August 2008, the war between Russia and Georgia has happened. Due to such conditions, and despite the strong oil, traders would sell off the Ruble. Thus, the political factor (war) has appeared as the dominant driver of the price.
Fundamental based trading guide
Following on this fundamental based trading guide, it is important for the trader to understand the difference between fundamental analysis and news trading. One may say these are equivalent things. However, here one might be wrong.
When markets move (and they move very fast), the instantaneous reaction to the news is almost unpredictable due to one simple reason – the lack of time. Traders usually do not have sufficient amount of time to properly assess the situation and create the right strategy just right after an economic release. I believe that news trading is more linked with the technical approach to the analysis, rather than fundamental.
The fundamental analysis requires full and proper assessment of the economic data. The analyst normally sorts out the data, leaving only important and relevant information for strategy formulation. Further, he/she further refines the pieces of information into some sort of map/picture/trend that can be used as a draft for the trading strategy. In order to create the strategy based on the fundamental factors, the trader needs to spot a certain pattern in the price movement.
One important moment to stress here is the interdependence of the economic factors. Since economic drivers in the world are closely connected to each other, the fundamental analysis should consider a full picture of economic events. This implies that the pieces of raw economic data in isolation will not mean anything important.
The fundamental analysis might appear to you as a very sophisticated and complex way of understanding the markets and creating your trading strategy. In reality, while fundamental traders do spend a lot of time studying the markets and analyzing the economic events, once you understand the basics, the process becomes much easier.
Yet, we encourage you not to base your trades only on fundamental analysis. The duo of fundamental and technical analysis works the best when it comes to forecasting the market movements.
Think we missed something? Maybe you have something to add to this Fundamental based trading guide? Let us know in the comments section below.