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The Basics of Fundamental Analysis

4:02 PM Oct 21, 2019
2678
Forex trading

No matter how accurate your technical analysis is, you cannot predict how the price will behave during major economic news releases. Even if you prefer to trade using charts only, you should not completely ignore fundamental analysis.

In this article, we’ll talk about the basics of this method and how you can make the news work for you.

What Is Fundamental Analysis?

In simple words, it is a prediction of further price behavior based on economic and political news releases. Changes in fundamental factors affect the level of the economy in a country. The level of the economy, in turn, affects the price of the national currency. However, for an accurate fundamental analysis, it is crucial to understand quite deeply the economic trends and the dynamics of exchange rates.

There are many fundamental factors used for analysis. Among them:

  • Employment/Unemployment rate
  • GDP
  • Interest rates in central banks
  • Sales levels (import, export, sales of houses, vehicles, etc.)
  • Speech of a Chairman of Central Banks
  • Inflation rate
  • Force majeure situations (natural disasters, military conflicts, political unrest)

There are two types of news impact on the Forex market:

  1. Short-term - the impact lasts from several minutes to several days. It is mainly used for 15-minute to 24-hour trades.
  2. Long-term - the impact lasts from several weeks to several years. Used for long positions.

How Does It work?

Using the economic calendar, you will receive a forecast for the selected news release. As a rule, the market responds to the publication of numbers the following way:

  1. The forecast turned out to be correct - the market reaction will be insignificant or there will be no reaction.
  2. The forecast was better than the current value - the national currency is expected to fall.
  3. The forecast was worse than the current value - the national currency is expected to grow.

The size of the difference between current numbers and forecasts also matters. The larger the difference, the stronger the reaction of the market is. If the forecast was completely false, then we can expect a sharp reversal of the exchange rate.

Is Fundamental Analysis Always Effective?

There is no perfect way to predict the future behavior of a currency pair. Fundamental analysis may be ineffective for the following reasons:

  • If the difference between the forecast and current numbers turned out to be insignificant, then the market may not respond to the news release.
  • With the simultaneous release of news affecting both currencies in a pair, events can cancel each other out. In this case, there will be no visible changes in the market.
  • Lack of information or incorrect data: for accurate analysis, you need complete and accurate data, otherwise you will incorrectly evaluate further market movements.
  • Wrong interpretation of the available data: in fact, an incorrectly made analysis.

Where Can You Get the Data for Analysis?

Most traders use an economic calendar. Click the news on the list to receive detailed data with a forecast and a possible impact on the national currency. Use only news with a high or medium impact on the rates.

In addition, you can take advantage of the analysis made by other traders or a broker. For example, in the Stories section of the Instagram FXCL page, you can get information about the main news for the current day and learn about the possible impact of a currency pair.

Plus, today there are a number of indicators that will timely inform you about the news releases and help you make technical analysis:

  • Interest rates
  • Inflation
  • GDP

A Couple of Tips for Successful Analysis

Before introducing fundamental analysis into your trading routine, remember a few more things:

  • Prepare a list of major news releases in advance. It’s best to do this every weekend for the week ahead.
  • Every morning, go through the list of news for today to be ready for possible market fluctuations.
  • Have the forecasts for each news release on hand to be ready to compare it with current numbers.
  • Do not rush to react to the news release. Indicators are often published incorrectly and are later adjusted. After the news, be prepared to check for such adjustments.
  • Use technical analysis to confirm the fundamental analysis and always use Stop Loss.

Bottom Line

Technical analysis is based on past data. Fundamental analysis is designed to respond to economic and political events. They form the future of the market.

Even if you have a successful trading plan that includes purely technical analysis, include basic fundamental analysis as well. So you can get the maximum profit with the growth of the trend and timely respond to possible sudden changes in the direction of the market.

And remember that market reaction to news releases can be controversial. Carefully study all the factors that may affect the currency pair, and only then make conclusions.

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