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 trading results overall. Most professional traders approach the markets using this winning combination.
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"
Forex Fundamental Analysis for Beginners
First of all, if you don't fancy reading this post, you can jump straight to my Learn Forex Fundamental Analysis video here.
Technical analysis requires skill. Fundamental analysis requires intelligence. That doesn't mean that fundamental analysis is harder to learn technical analysis. It just means that they are different.
A combination of simple technical analysis and simple fundamental analysis can be a fantastic recipe for success, though. Let me teach you how...
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 simply the interpretation of interest rates; what a country's current interest rate is and if the rate is likely to change in the future.
Most economic figures that are used in the Forex markets are simply used to help predict whether a central bank is likely to raise, pause, or cut interest rates.
Which economic figures are analysed by Forex traders?
The most commonly tracked economic figures are those that move the markets the most i.e. the economic figures that have the greatest 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 also move the Forex markets?
There are the main political events that can move the currency markets; war or the increased risk of war, peace agreements, a collapse of Government, elections, referendums, trade disputes and trade agreements, major changes of any governments economic policy, a governments response to pandemics, and much more.
Financial markets don't like uncertainty as this increases risk. Money flees from risk. So any economic or political event that increases or reduces risk can move the markets.
What role do central banks play?
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.
As a rule of thumb, interest rate hikes generally strengthen a currency. Interest rate cuts generally weaken a currency.
Why use Fundamental Analysis?
As a Forex trader, there are many reasons why you should use fundamental analysis. These include..
Additional Trading Opportunities
Understanding Forex fundamentals can create additional trading opportunities. These are opportunities that technical analysis will not signal or will signal too late.
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.
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 a game of reason.
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.
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 online content that can help"
Which Economic Figures should you use?
Interest rates are the driving force of 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 forecast future price direction and is paramount for any Forex fundamental analysis.
Inflation rates are generally the biggest 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. All these figures give insight into how an economy is performing, which has an impact of currency movement.
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 fantastic website that shows historic economic figures and provides a commentary on central bank speeches.