Understanding how fundamental analysis comes into play


To put it simply, fundamental analysis is an investigation of macroeconomic, political, and other global phenomena, influencing currency rates. Experts in fundamental analysis say that, first and foremost, changes are provoked by a piece of news (an event). The latter provokes a chain of currency operations in Forex, which, in turn, provoke fluctuations in currency rates.

To carry out serious fundamental analysis, one needs to understand finance, international relations, economics. Normal traders naturally want to make money, not learn. Hence, in the process of trading they tend to rely on expert opinion, having quite a limited idea of fundamental analysis. However, understanding the basics is advisable to every trader.

Events influencing the market can by political, macroeconomic, natural, etc. Rumors can also be important. Also, events can be divided into expected and unexpected ones. An expected event happens at an exact moment. These are seasonal events and publications of some political and economic indicators. Unexpected events are natural disasters, coups, terror acts. Such things are immediately reflected on currency rates of the countries that have something to do with each of the events.

A curious phenomenon is publishing economic indices with a lag. This allows for assessing them in advance. Forex adjusts to them at once based on the forecasts of leading analysts. If the officially published value coincides with the forecast, currencies go on moving in the previous direction. However, for financial markets, deviations from forecasts are most interesting. In such cases, the market reacts immediately.

Depending on how long an event influences the market, they can be divided into long-cycle and short-cycle events. A long cycle is from several weeks to several years. A short cycle is two to three minutes to several days. It can be provoked by political events, rumors, some minor economic values.

Fundamental analysis is not always a successful attempt to see some connection between an economic situation in the country and the exchange rate of its national currency. Sometimes the market goes against all forecasts and all rules from books. Forecasts have a limited probability. However, experts say that a system that works more or less well is better than no system at all, while knowing the basics of macroeconomics is a direct way to market success.

We have figured out that the price is affected by some fundamental reasons. But does an ordinary "home-made" trader need fundamental analysis? Most speculators start from technical analysis. Having mastered tech analysis, some switch to the fundamental one, while others never think about it. Why so? Supporters of tech analysis (especially fans of Price Action) think that the market accounts for all fundamental events on the chart, so we need just a "bare" chart for successful trading.

So, the question is, do we need tech analysis or not. To my mind, one can use just tech analysis and trade successfully. Even if you keep an eye on economic events or the geopolitical situation, the effect will be the same as from fortune telling on tea leaves. Just take a minute to think where you take the data for fundamental analysis. On the Internet, of course, because it is the fastest way to retrieve some information. But who would put insider information on the Internet where it can be used by millions of people. Clearly, no one would. Fundamental analysis is more for serious guys from Wall Street that have billions on their accounts. If you are not from this street, fundamental analysis is something extra for you.

I do not mean that fundamental analysis is not necessary at all. You need it for your personal development and financial literacy. This is like studying economy and finance at the university: you will have an idea of how this or that event influences the economy of a certain country. A good trader must know such things. In the countries of the former Soviet Union financial literacy is quite poor. Regardless of the market of financial services being quite well developed, people prefer keeping their savings (money) under the pillow, literally, which influences the economic development of the countries. This is because people do not trust banks, investment trusts, and other financial entities. So, in this sense, knowing the basics will only do good.

The best how and where you can apply fundamental analysis in trading is the economic calendar. It includes the most important news that can influence the direction of price movements. Again, here we can find out the time when the news is due but not the effect it will cause, whether it will be good or bad for you personally. For example, we know that indicators are going to be published today but do not know the exact values, The best trading decision here would be abstaining from the market when the news is due. This is everything about fundamental analysis. I see no reason using it in any other way.

To sum up, I will again say that fundamental analysis is a good thing but you will not be able to use it in trading at its best. If you want to succeed in trading, rely upon the good old technical analysis.

By Dmitriy Gurkovskiy, Chief Analyst at RoboForex