During your travels, you have certainly met Gulliver, Frodo and the subject of fundamental analysis.
Wait a minute…
We have already introduced you to fundamental analysis in our kindergarten classes! Now, let’s get to the heart of the matter! What exactly is it and how to use it? In fact, fundamental analysis is the study of fundamentals! Easy, isn’t it?! Do you understand?!
But it goes further than that…much further..
When you hear people mention the fundamentals, they refer to the economic fundamentals related to the economy of the country of the currency concerned.
Economic fundamentals include a large amount of information (economic, political or environmental, data, announcements or events).
Even a lower credit rate is fundamentalist data and you should know how some people make it a basic new way to make a winning trade on a EUR/USD sale.
Fundamental analysis is the study of these factors used to predict future price or currency movements.
It is the study of what is happening in and around the world, both economically and financially, and tends to focus on how macroeconomic factors (such as economic growth, inflation, unemployment) affect the products we trade.
Fundamental data and their many forms
In particular, fundamental analysis provides information on how the share price should react or at least how it could react to a certain economic event.
Fundamental data come in different forms.
They may appear in the form of a report published by the United States Federal Reserve on real estate sales news. It is also possible that the European Central Bank may change its monetary policy.
The publication of these public data often disrupts the economic climate (or even better, the economic spirit of the moment), thus creating a reaction from investors and speculators.
There are even several examples showing that when no specific report has been issued, the anticipation of this report alone has been sufficient to generate market movement. This is another example of what are called Fundamentals.
Interest rate speculation can be traded hours or even days before the current interest rate is published.
In fact, currency pairs are known to fluctuate by as much as a hundred pips just before some major economic announcements, exposing the brave trader to possible profit.
That’s why many Forex traders are here before the release of some economic figures and you should be too!
In general, economic indicators represent a significant portion of the data used in fundamental analysis. Just as a fire alarm can detect smoke or smell heat, economic indicators provide information on a country’s economic health.
While it is essential to know the numerical value of an indicator, it is equally important to master market anticipation and movement forecasting.
Understanding the impact resulting from published figures compared to expected figures is crucial in trading. These factors deserve your full attention when deciding to trade.
Don’t worry, don’t worry! All this is much simpler than it seems and you won’t need to go through Polytechnique to trade the next economic news.
Fundamental analysis is a valuable tool for estimating future conditions in an economy, but not for predicting currency prices in the short term. This type of analysis also has its shadow side, the information provided by the fundamentals in the form of regularly published reports or changes in economic policies is more vague than some technical indicators.
The analysis of economic publications and fundamental data reports looks something like this:
“The interest rate rising by X% could cause the euro to recover bullishly.”
“The U.S. dollar should fall with this indicator at this level.”
“Consumer confidence has dropped by 2% since the last report.”
Here is an economic report, and then what?
The market tends to react according to the emotions of individuals. These emotions may be based on a reaction to a certain economic publication, which in turn influences their feelings about current market conditions.
And as you would have guessed, there are tons of people with different ideas and impressions.
You certainly think: “Wow, what uncertainty, this fundamental analysis”!
You couldn’t be more right.
It is 100% impossible to know in which direction a pair will go because of the constant renewal of economic data.
However, this does not mean that this form of analysis should be discarded.
Not at all, it would be a mistake.
Indeed, because of the considerable volume of fundamental data available, most people have great difficulty in assembling all this information in a consistent way.
They are able to understand a given report but cannot weight it or integrate it into the economic landscape. It simply takes time to get a deep understanding of the economic data.
In addition, since fundamentalist data are only reported for one currency, data for the other currency in the pair should also be taken into account and compared in order to obtain a more relevant view.
If you really don’t have time to go through and decipher the reports and economic data, don’t panic! You can read reports and summaries on Forex websites or in business newspapers.
As we mentioned at the outset, it is a matter of identifying the strong pair associated with the one with weaknesses.
At this point, you are certainly waiting for the answer to the following question: “Will I really need to use fundamental analysis to become a successful trader?”
We understand very well that there are purists on both sides.
The Technical Analysis seems to gather all the votes of traders for the short-term methodology, with the share price as the focus point.
Intermediate traders as well as long-term traders like to focus on fundamental analysis as well because it helps to better assess the value of a currency.
We like to revive discord by saying that you should use BOTH!
Strategies focused on the technical aspect are reduced to ashes when a fundamental event occurs. But on the other hand, a purely fundamental trader will miss the short-term opportunities that models will offer.
A mixture of technical and fundamental analysis covers all angles. You are not unaware of scheduled economic events or publications, but you can also identify and use technical analysis tools and forms available on the market.
We have some examples of trades that will show you the perfect combination of technical analysis and fundamental analysis and the great profits that have resulted.
You can find the answers to your questions there!
In this lesson, we have discussed the basics but we will soon discuss the major factors of fundamental analysis that influence currencies. These will include interest rates, monetary policies and economic reports that have a profound impact on the market.
As mentioned above, online broker sites and business newspapers are excellent sources of economic updates. Combine this with newly published articles and fundamental analysis will no longer be a problem!