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What is Fundamental

Analysis?

There are three major trading methods used by traders namely Fundamental Analysis, Technical Analysis and Price Action and the debate as to which is the best method to use has been argued for a long time. Fundamental Analysis takes into account economic, political and social factors affecting the different countries concerned to forecast the future value of their currency, whilst technical analysis looks at the history of the currency by using indicators to predict future direction of the currency and price action traders look at the current price to determine future price moves. Fundamental analysis is generally used to determine the long term future moves for the currency. Every week an economic calendar is published which gives the previous result of certain economic factors like Interest Rates, Employment, Inflation, Consumer Sentiment, manufacturing, productivity and many others. The news also includes financial analysts forecasts of what they think the numbers should be. The actual news announcement is then compared to the analysts forecast to determine whether the result is better or worse for the economy of the country. Many traders enter trades based on the deviation compared to the analysts forecast, the previous news and the actual numbers broadcast by the country. This announcement can cause the currency to move in a direction immediately the news is published, often though the move in the market is small and not sustained because traders are looking at the overall financial health of the country rather than the individual aspect that was reported on. Some news announcements are considered more important to the overall picture and will cause a larger more sustained market move compared to other announcements that are considered to be of less importance when compared to the overall picture. Often though, other news that is not regularly published in the economic calendar can have an effect on the value of the currency like political or social factors affecting the country. Fundamental Analysis is used to determine the long term future value of a currency rather than immediate small changes in price; and is ideal for swing traders and position traders who will be in the market for days or weeks at a time. To be a successful fundamental analyst, traders must take into consideration the overall picture to determine future moves rather than individual announcements. Fundamental Analysis therefore does not concern itself with short term market fluctuations but rather attempts to measure the long term trend and likely duration of the market. The fact that there are an immense number of factors to consider that can potentially affect the long term trend it is very difficult for untrained traders to make a determination of the long term trend based on individual news items. Traders should therefore concentrate on when the major news is to be announced as this can have a detrimental effect on their short term trades and stay out of the market prior to the announcement as well as protect the current positions against the short term moves against them. Many times the news is already factored into the market when it is announced and the market simply continues in its current direction regardless of the fact that the individual announcement may be good or bad for the country’s economy. In summary fundamental news trading is probably not suitable for new or novice traders unless they have been specifically trained to interpret the news based on the macro picture of the country’s economy. They can instead use larger time frames with their trending indicators to follow long term trends if they want to become swing or position traders. In order to become a competent fundamental analyst a trader needs to set up a model that includes a basket of news items each with the correct weight assigned to the individual aspects; and include external factors like interest rate differentials to create a predictable long term model.