ACTUAL FOREX TRADING
Learn Fundamental Analysis for Forex Trading
Newer traders, especially those who want to trade "pure price action" or use technical analysis, often ignore fundamental analysis.
Traders who combine fundamental and technical analysis often achieve higher win rates and better overall results. Most professional traders use this winning combination.
If you don't fancy reading this post, you can jump straight to my Learn Forex Fundamental Analysis videos here. The videos are free.
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Fundamental Analysis for Beginners
"Combining fundamental and technical analysis is the ultimate way to profit from the markets. Most traders don't want to accept this truth; they only want to use technical analysis. This is usually because of the work involved in learning and following market fundamentals - it either scares them or seems like too much effort"
Forex Fundamental Analysis for Beginners
Technical analysis requires skill, while fundamental analysis requires intelligence. That doesn't mean that fundamental analysis is more complex than technical analysis; it just means they are different.
Combining simple technical and fundamental analysis can be a fantastic recipe for success. Let me teach you how...
What is fundamental analysis?
Fundamental analysis (FA) is the process of reviewing economic data, potential economic hazards, and growth to predict future market direction.
In Forex, FA involves tracking economic data to forecast interest rates.
Most economic figures used in the Forex markets help predict whether a central bank will raise, pause, or cut interest rates.
Which economic figures do Forex traders analyse?
The most commonly tracked economic figures move the markets the most, i.e. the economic figures with the most significant influence on interest rates.
The economic figures that impact the markets most are usually inflation rates, unemployment rates, GDP figures, PMI figures, retail sales figures, payroll and job figures, and trade balance figures.
Can politics move the Forex markets?
Yes. The main political events that can move the currency markets are war or the increased risk of war, peace agreements, a collapse of Government, elections, referendums, trade disputes and trade agreements, changes in any major government's economic policy, a government's response to pandemics, and much more.
Financial markets don't like uncertainty because it increases risk. Money flees from risk, so any economic or political event that increases or reduces risk can move the markets.
In Forex, what role do central banks play?
A central bank's primary responsibility is to keep inflation healthy, usually around 2%.
Central banks raise and cut interest rates to influence a country's inflation. Lower rates can increase inflation and stimulate economic growth, while higher rates can reduce inflation and slow economic growth.
As a rule of thumb, interest rate hikes generally strengthen a currency, while interest rate cuts typically weaken a currency.
Why use Fundamental Analysis?
As a Forex trader, you should use FA for many reasons. These include:
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Additional Trading Opportunities. Understanding Forex fundamentals can create additional trading opportunities. These are opportunities that technical analysis may not signal, or may signal too late.
The best traders use fundamental analysis to determine trend direction and technical analysis to determine entry and exit points, or to confirm their fundamental market bias.
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Professionalism. Real traders understand the market's why and how. They seek to understand the market's beat and what drives prices. They use logic and reason behind their trades.
This is only possible if a trader uses fundamental analysis as part of their daily trading.
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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 the number of losing trades. After all, a strategy based on just technical analysis is a game of chance. A strategy based on fundamental analysis is a game of reason.
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Risk Management. Economic news brings market direction and volatility. Knowing which events impact the Forex markets - and when they impact - can reduce your exposure to spread widening, slippage and unwanted losing trades.
"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, you will understand more and more. There are also books and online content that can help"
Which Economic Figures should you use for Forex Fundamental Analysis?
Interest Rates
Interest rates drive the market. If interest rates go up, a currency should strengthen. If interest rates go down, a currency should weaken.
Tracking and forecasting interest rates is the most effective way to predict future price direction and is paramount for any Forex fundamental analysis.
Inflation Rates
Inflation rates are generally the most significant influence on whether rates will hike, pause, or be cut. Tracking inflation rates is an effective way to forecast interest rates.
Other Economic Data
Other economic figures worth tracking are unemployment rates, PMI figures, retail sales, trade balance, GDP growth, and current account deficits. These figures show how an economy is performing, which affects currency movements.
Tools that I use for Fundamental Analysis
Bloomberg TV is free on YouTube and is often available as a channel on your home TV.
It is an excellent resource for gaining trading ideas based on fundamental analysis, breaking news, and learning trading lingo.
Trading Economics is a fantastic website that shows historical economic figures and provides commentary on central bank speeches.
Economic calendars forecast upcoming news events that could impact the Forex markets. They usually label events as high, medium, or low impact, which can help with risk management.