Fundamental Analysis Basics
By: Ashley
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Lets take a few minutes to discuss Fundamental Analysis with regard to the Forex Market.
Fundamental analysis refers to the study of the core underlying elements that influence the economy of a particular entity. By analyzing economic indicators, government policies, and factors in society, Fundamental Analysis attempts to predict price action and market trends. There are other elements that also have a factor in Fundamental Analysis. Think of it this way... Fundamental Analysis is analyzing things that happen in the world that can affect how people react, thus potentially predicting the reaction in the Forex Market.
Quite often you might hear the question "Are you a Technical Analyst or a Fundamental Analyst?" Well, in reality, you need to be both, because the pure Fundamentalist will ignore the technical indicators available for analyzing charts, and the pure Technical Analyst will ignore impending economic data, political effects, or society reactions to things like news reports that shift market opinions. Keeping your eyes and ears on all of these things will help you to be more informed and potentially a more successful trader.
Fundamental Analysis can be a very effective way to forecast economic conditions and climates, even if it won't help you decide on exact market prices for trading purposes. For example, you may read and analyze a forecast of the US Non-Farm Employment Change. This may give you a picture of the general health of the economy and the forces at work behind it, especially as it relates to the spending power of the employed people in the country. However, that won't give you a precise method as to best utilizing this information into trading data for exact prices.
Fundamentalists usually create models to formulate a trading method. Some of them may even be fairly successful, as there are many traders that "trade the news." However, many are also unsuccessful, since the news may not create the reaction in the markets that the Fundamentalist expects to occur. Trading methods based on Fundamental Analysis are as numerous and varied as trading methods based on Technical Analysis. So just as with ANY trading method you may decide to try, always review it, test it, and see how it best fits within your own trading strategy and style.
Given the expansive information available to aid the Fundamentalist, be careful to analyze only the information that works with your trading method. Quite often you can find news and reports that contradict each other, making Fundamental Analysis extremely difficult. Our suggestion is to ignore any information that clearly works against each other.
For Forex Fundamentalist traders, the fundamentals are everything that makes a country and its currency move. From interest rates, to employment information, central bank policies to federal financial actions, the fundamentals are a varied and dynamic mix of plans, events and behaviors. Concentrate on the most influential components and don't worry about all the little details. Basically, if you are going to trade based on fundamentals, keep the big picture in mind.
I hope this discussion on Fundamental Analysis has cleared up any questions you may have had. If not, feel free to drop us a question. Keep learning and mastering Forex with your guardian angels, right here at PipsAngels.com. See you soon!
