Forex traders and investors are always looking for ways to improve their trading skills.
Fundamental analysis is a way of analysing market data in order to determine the intrinsic value of an economy.
It can be used to predict the direction of a country’s economic health as well as its future performance, which gives it great importance in forex trading.
In this article, we will go over what fundamental analysis is and how you can apply it to your forex trading.
What Is Fundamental Analysis
Fundamental analysis is a method of market analysis that studies macroeconomic indicators and economic data in an effort to predict future price movements.
Fundamental analysts believe the prices of stocks, bonds, currencies, or other assets are heavily influenced by the underlying fundamental factors like interest rates, exchange rates, inflation etc.
For example: if investors expect inflation levels will rise in coming months then they may sell financial instruments with fixed nominal returns because their real (inflation-adjusted) purchasing power would be decreasing over time.
On the contrary higher expected inflation could cause consumers to buy now before goods get more expensive down the road so demand for products such as automobiles might increase which would drive up stock prices for car manufacturers leading traders to invest in automobile stocks and causing them to rise in value.
When using Fundamental Analysis it is important to take a look at different economic and news events that are being released each day as they may have an impact on the market.
This information can be found on various websites such as Bloomberg, TradingView, Yahoo Finance or Investing.com.
These data points are crucial to understand and look out for as they can move the market significantly.
Especially to grasp the concepts of forex trading for beginners.
For example, the non-farm payroll can move the market 30-100 pips within seconds depending on the data released.
If you have trades open during these times, you can be taken out of a trade and what could have been a winning trade, could quickly change based on the data output.
So, one of our rules to trading is to not trade near or during high-impact news events.
Why Use Fundamental Analysis
It is important to understand how the economies are doing as these play huge roles in whether a currency price is rising or falling.
Economic Data drives the prices of the currencies, so by understanding how different economies are doing in a general direction can easily highlight where the markets could go over a course of several months or greater.
The way we like to explain it is imagine a treasure map.
Fundamental analysis is the map for you to follow.
Technical analysis is the tools to dig for treasure.
Without either, it’ll make hunting for that treasure hard!
It’s a simple analogy but it’s pretty clear that both forms work hand in hand.
In fact, if you can understand an economies underlying strength and weaknesses – you will not be surprised when something happens in the near future.
For example, you can gauge the impact of NFP prior to the event by simply following the weekly claims data.
This is really simple stuff, but will put you leagues ahead of other retail traders and most importantly — avoid making mistakes that can cost you money.
Avoiding mistakes is one thing, but once you understand economic data points you will be able to use this as an invaluable asset to your trading.
What is the Difference Between Technical and Fundamental Analysis?
Technical Analysis is the art of predicting market movements using visual representation and to time your trades accurately using price action, chart patterns, or technical indicators.
Whereas fundamental analysis is the understanding of macro and global economic events and data released by countries to issue to the markets which highlight whether there is growth in the country or not.
Fundamental analysts study different indicators such as interest rates, exchange rates, inflation data to predict future market price movements.
Technical analysts focus mainly on studying past performances in order to find patterns which could potentially lead to predicting future market price trends.
Technical analysis considers everything to do with the economy is already priced in to the market, therefore, there is little to no need to follow the figures as strictly.
Technical Analysis can be used in conjunction with Fundamental Analysis but should not be the only tool you use.
Fundamental Analysis vs Technical Analysis
Critical thinking about the current state of economics and markets helps traders assess whether their trades will yield profits now or later.
When considering investing, traders want to know what direction currencies might go based on fundamental data so that they buy when prices are low and sell high while avoiding buying when market prices are high only to see them drop again because of some unforeseen event (e.g.: natural disaster).
Investors need both technical analysis and fundamental analysis to make informed investment decisions.
Benefits of Fundamental Analysis:
– Forecasting future price movements that are dependent on macroeconomic indicators and economic data.
– Identifying the most favourable times to invest in the forex markets, or other assets, so you enjoy the underlying economic growth/contraction to enhance your trades further.
– Tracking changes in currency prices with events that might affect those changes such as interest rates, exchange rates, inflation etc.
– Using technical analysis and fundamental analysis together to make informed investment decisions
– Fundamental analysis is a way of analysing the market by looking at economic and news events that may influence currency prices.
Examples: In order to understand how fundamental factors like interest rates, exchange rates, inflation etc. can affect investor behaviour you need to study different indicators such as labor numbers or GDP growth figures which could potentially lead to predicting future price trends.
Tips For Using Fundamental Analysis
– Fundamental Analysis is best used in conjunction with Technical Analysis
– Look at macroeconomic indicators like GDP growth figures when they’re released and keep an eye on things like fiscal policies which could have a significant impact on your investment decisions!
– Fundamental Analysis should be done on a regular basis to determine if the underlying trend of the market is shifting based on the economy expanding or contracting.
– It’s also important to study previous economic reports and events that might have an unconscious or subconscious effect on investor behaviour such as changes in inflation which could influence how investors allocate their money.
Drawbacks of Fundamental Analysis
The Fundamental Analysis approach has its own set of drawbacks.
The fundamental analysis is considered to be an indirect approach of evaluation of the current market conditions and the associated risks.
In other words, by following this approach you can’t assess the market’s response to some changes in the fundamental factors.
The fundamental analysis only helps in predicting future trends and it should not be used as a financial model.
Furthermore, it is difficult to measure the effect that changes in macroeconomic indicators have on the general price level and hence, on asset prices.
For example, when unemployment rates are going up, interest rates may react by increasing for both short-term and long-term rates but still there may be no significant change in generalised price level.
Even though the fundamental analysis approach is not perfect, it can be used as a supplementary tool. It’s useful for planning and making forecasts on forex pairs that correlate.
Top Economic Indicators
Economic indicators are like a report card for the nation’s economic performance.
The government releases these reports to show how well the country is doing economically, but there may be other factors that affect this such as geographical location and availability of natural resources.
It is important for traders to have access to real-time information that can affect the way they trade and invest, which is why it’s essential for them to monitor economic reports.
Economic indicators such as GDP growth or unemployment rates are released at scheduled times each month by governments around the world in an effort to improve transparency of their country’s situation and better communicate with investors who may be interested in investing there.
These numbers provide invaluable insight into a nation’s economy: if you see positive figures like higher than expected manufacturing output, increased profitability from exports on a currency exchange rate basis then this signals health within these two sectors.
Gross Domestic Product (GDP)
GDP is a way to measure the size of your country’s economy.
It takes into account all the money you get from selling things during that year. You can use GDP to see how your country is doing.
If it gets bigger, then you are doing good. But if it doesn’t grow, then you need to do something different because you are not doing well.
The most common way of looking at GDP is by comparing the current year with a past year or years and seeing how much it has changed over time; however, some traders prefer not to look at this number right away because they think it may be too late or too soon for them to act on what they have learned from this statistic alone.
Retail Sales
The retail-sales report measures how much money people spend in stores.
They take a sample of every store and add up the money they made from that sample to find the total amount of money spent.
The report is helpful because it can show what people buy and how much they spend over time.
It can also help predict what might happen in the future, and tell us if our economy is going well or not so well now.
Industrial Production
This report shows how factories, mines, and utilities in the country are doing. Sometimes there is a change in production.
When there is an increase it is good to be close to or at the maximum capacity utilization of each factory.
People who trade with this indicator are usually interested in the production of utilities. This is because it can be very volatile.
Changes in the weather, like rain or snow, can affect the demand for and production of energy which also affects currency trading.
Consumer Price Index (CPI)
The CPI measures how many things have changed in price.
It has a lot of different categories.
The report and a country’s exports can be used to see if that country is making or losing money on their products and services.
But it can be hard to tell what the export prices are because they often change relative to the strength or weakness of the currency.
How To Use Fundamental Analysis
In this section, we will go through the key data points released each month, what they mean and how the effect the markets.
In this course, you only need to understand the forex trading basics as you will not be holding onto your trades for months/years etc.
You will be using the data points to gauge and build an idea on the direction of the overall market sentiment and enabling you, by understanding the economies, a greater advantage of trading in the right direction with the smart money.
A lot of courses will shy away from this section because it is more “academic” and they don’t fully understand the impact of these events on a larger level. We will be going into great detail with trading economic data in the future.
The most overlooked part of fundamental analysis for many traders (especially beginners) is the very short-term impact they have on the market.
By highlighting these high-impact data points, this will help reduce poor trades and should always be taken into consideration when entering a trade. The whole point of this free forex trading course is to share the true golden nuggets with you and to reduce the element of luck involved in trading!
With fundamental analysis in forex trading, it is important to consider the impact of each data across each asset – this is the kind of analysis that will take the longest to understand, but when you do – everything will be part of a bigger picture and making trading so much easier to profit from.
Wrapping it up:
Fundamental analysis is about using economic indicators to predict an economy’s health. It can be used to predict where a market will go. It’s important to learn along with technical analysis. There are several economic indicators to use.
If you’re looking for a way to predict where the market will go, it may be worth considering fundamental analysis.
Fundamental analysis is based on economic indicators that can help determine how healthy an economy is and whether or not there are any potential problems ahead.
It requires knowledge of several different economic indicators, but with practice, it could provide some insight into what might happen next in the markets.
If you found value in this post please share it with others so that more people can benefit from learning about how these two approaches differ!