The Basics of Fundamental Analysis
Fundamental analysis can often be ignored by newer traders. Especially traders that want to trade "pure price action" or use technical analysis.
The truth is, traders that use fundamental analysis combined with technical analysis often have a higher win rate and better results. Most professional traders approach the markets using this winning combination.
The truth is, all Forex traders should use some degree of fundamental analysis in their trading, even if just for risk management purposes.
Let me teach you the basics of fundamental analysis, from the perspective of a price action trader...
"Combining fundamental analysis and technical analysis is the ultimate way to make money from the markets. Most traders don't want to except this truth, as they want to use technical analysis only. This is usually because of the work involved in learning and following market fundamentals - it either scares them or just seems like a lot of effort"
Fundamental Analysis for Beginners
Technical analysis requires skill. Fundamental analysis requires intelligence. Is intelligence more valued than skill? No, they are equals. Is intelligence harder to teach and than skill? Yes. Hence why this post was so difficult to write... I did my best though and kept things as brief and simply as possible.
What is fundamental analysis?
Fundamental analysis is the process of reviewing economic data and potential economic hazards and growth in order to predict future market direction.
In Forex, fundamental analysis is the scrutiny of economic figures, political decisions, and central bank decisions, to forecast future currency strength or weakness.
Which economic figures are analysed by Forex traders?
Pretty much everything and anything... The most commonly tracked economic figures, and those that cause the most currency movement are; Inflation figures, unemployment rates and GDP figures.
What political decisions impact the Forex markets?
Once again, this list could be endless, but here are the main political events that can move the currency markets; war or the increased risk of war, a collapse of Government, elections, referendums, trade disputes, major changes in tax policy, and major changes of any economic policy.
Central Banks Explained
The main responsibility of a central bank is to keep inflation at a healthy rate, usually around 2%.
Central banks hike and cut interest rates as a way to manipulate a country's inflation. Decreasing rates can increase inflation and stimulate economic growth. Increasing rates can decrease inflation and reduce economic growth.
Inflation and interest rate changes have a high impact on the Forex markets.
Why use Fundamental Analysis?
As a Forex trader, there are many reasons why you should use fundamental analysis. These include..
Advantage #1 - Additional Trading Opportunities
Understanding Forex fundamentals can create additional trading opportunities. These are opportunities that technical analysis will not signal.
The best traders use fundamental analysis for determining trend direction and technical analysis for entry and exit points, or as confirmation of their fundamental market bias.
Advantage #2 - A Higher Win Rate
Economic news will always triumph over price action, technical levels, and indicators. If you can learn to understand and trade the news, you can significantly reduce your amount of losing trades. After all, a strategy based on just technical analysis is a game of chance. A strategy based on fundamental analysis is based on reason.
Advantage #3 - Risk Management
Economic news brings market direction and volatility. Knowing which events impact the Forex markets - and when they will impact - can reduce your exposure to spread widening, slippage and unwanted losing trades.
Advantage #4 - Professionalism
Real traders understand the why and how of the market. They seek to understand the beat of the market and what is driving prices. They use logic and reason behind their trades.
It is only possible to do this, if a trader uses fundamental analysis as part of their daily trading.
"Learning fundamental analysis is much easier than you may think... Just listen to Bloomberg and other financial channels. At first, you will understand very little. As the weeks and months pass though, you will understand more and more. There are also books and content online that can help"
Tools that I use for Fundamental Analysis
I honestly don't use much, but here you go...
Bloomberg TV - Click Here
Bloomberg TV is free on YouTube and is often available as a channel on your home TV.
It is a great resource for gaining trading ideas based on fundamental analysis, breaking news and learning trading lingo.
Economic Calendars - Click Here
Economic calendars forecast upcoming news events that could impact the Forex markets. They usually identify events as high, medium and low impact, which can be great for risk management.
Trading Economics - Click Here
This is a website that shows historic economic figures and provides a commentary on central bank speeches.
TradingView - Click Here
TradingView provides charts showing econmic figures for countries across the globe. Not many people know this. Just search for 'United Kingdom GDP', 'United States Retail Sales', 'Australian Exports', etc, etc. TradingView will handle the rest!
Watch me trade Forex using fundamental analysis...
