Lesson 39 – Fundamental Analysis, A Guide for Forex Traders
As we’ve noted previously, understanding fundamental analysis is an important skill when approaching currencies.
It is an approach in which you analyze the market by observing economic and socio-political issues that may affect the country and its currency.
These issues are crucial in influencing the supply and demand of a currency, so it’s definitely a good idea to stay on top of these issues during periods when you are trading.
Fundamental analysis versus Technical analysis
So far in this course, the only analysis we have covered is technical. By which we mean; thus use of indicators, oscillators, candlestick reading, and the analysis of price action.
While this style of analysis is good for short/medium trading, the biggest influencers on the market will always be fundamental factors.
Often, traders tend to ignore fundamentals of the currencies that they trade with. The argument being, that macroeconomics will not affect them much since they trade with such short periods.
While this has some merit, it is very naive and fundamentally flawed to think so. It is always the case that, the more information and understanding of the markets we have, the better decisions we can make.
Only using technical analysis when trading is like trading with a blindfold covering one eye. At some point, you will definitely miss a key piss of information and it will hit your account balance like a brick.
Fundamental analysis can help us pre-empt potential movements in the market when there is uncertainty or a sudden shift in sentiments.
Identifying this beforehand will make sure that we’re on the right side of trades, or even inform us to not make trades at all because of the risk.
For example, even if you observed all the chart indicators, drew the best resistance and support lines, you can throw that all away if you don’t pay attention to events like a central bank adjusting its interest rate, or a surprise referendum/election result (e.g Brexit or Trump).
One of the best ways to keep up with all these events is following an economic calendar. You don’t have to be an expert economist that keeps tabs on all happenings of the world, but following an economic calendar will really help you stay informed on the things that matter.
You just need “fundamental analysis” not volumes of expert, in-depth analysis to grasp a basic understanding of what’s going on, and an economic calendar does just that.
It basically lists all major economic events that happen all over the world in an easy-to-read format and overview.
It helps since you can just scroll through and see everything that is important for the currency pairs that you are trading, rather than have to search for news sources yourself and have to create whole files of information notes to keep track.
Things that decent economic calendars should always list are:
- Political Elections and referendums
- Interest rate changes by central banks
- Economic metrics (CPI, GDP, employment rate, consumer spending, etc)
- Company quarterly earnings reports
- Key speech dates
- Major law changes
This helps you save time and puts together everything you need to know all in one place with an overview of everything you would want to know. With some providers, you can even filter the lists to display the exact things you’re looking for.
But, be aware even with an economic calendar and the overview it brings, please stick to one or two currency pairs when starting out.
Or else you’ll get too overwhelmed with the information overload that you’re not familiar with and you’ll have no idea how to juggle everything.
It’s best to focus on one or two pairs till you master them and their relevant news before you move on to tackle other currency pairs.
If you want to go a step further with fundamental analysis and understanding trends and events that affect the forex markets, then find yourself a good news source.
Finding news and data on markets is pretty easy and there are many sources do choose from. If you prefer everything in video or TV format, you can find some 24 hour coverage on the markets from some providers.
Generally, the internet is the best place to look into. Also, sticking to the largest and most-established sources will make sure your coverage is extensive and reliable. Here are some suggestions for forex news.
- The Wall Street Journal
- Financial Times
- UK Investing
These definitely aren’t the only ones out there, but they’re definitely a great choice.
In the next lesson, we’ll go over “Economic Indicators” for forex traders. See you there!