What is fundamental market analysis?
What is fundamental market analysis?
Technical and fundamental analysis are the main financial market study methods that traders use. Fundamental analysis takes into account the impact of the country's social, political, and economic spheres on the price of a certain trading instrument.
In order to correctly interpret price movements on the market using fundamental analysis, it is important to be able to compare various events with each other to form the overall picture and make a forecast based on it.
How do traders use fundamental analysis?
If, based on the economic indicators, the unemployment rate is growing and the production sector is down, the country's economy is in decline. The fall in GDP for more than 2 quarters in a row indicates an economic downturn, which leads to a decrease in the value of the national currency. On the other hand, an increase in GDP will lead to a strengthening of the national currency against other currencies.
A trader determines the state of the economy at the current moment by analyzing the country's economic state according to various indicators. Parameters such as the country's line of policy, the form of government, inflation, unemployment rate, interest rates of central banks, social policy, and the standard of living of the population affect the value of the currency and form supply and demand on the financial market.
By paying attention to economic factors, a trader is able to predict in which direction the price will move and make profitable trades based on this.
How to do the fundamental analysis?
Each country has a lot of economic indicators that affect the exchange rate. In order to take everything into account for your analysis, you need to use the economic calendar.
The economic calendar covers all economic events and indicators in the world. It also shows the day and time the data will be published around the world.
How to use the economic calendar?
Many brokers, news websites, and trading platforms provide economic calendars. Most of them are similar. They make fundamental analysis easier thanks to auto-updates, user-friendly interface, and many different features.
Based on the strength of their influence on the price movement, all published news is divided into several levels, which are marked with exclamation marks, asterisks, or different colors.
By clicking on an event, you can get more information. Some calendars show the possible impact of certain events on the market. In most calendars, you can filter events by importance, country, event type, and more.
It should be borne in mind that sometimes there are spontaneous events that simply cannot be scheduled in the calendar. Usually, this is force majeure news about natural disasters, terrorist attacks, bankruptcies, defaults, coups, and other similar events. Such news can cause both an increase in the exchange rate and a complete collapse of the market.
How to trade on news?
In order to do a correct and complete analysis, first of all, you need to closely follow the news and important events on the market. The market is never indifferent to the big news. Many market fluctuations are associated with the interpretation of fundamental factors by the traders themselves.
To understand how certain news will affect the market, you need to do a fundamental analysis. Select the news in the economic calendar that seems promising for your financial strategy. Look at the last time this type of data was published, open the chart of the currency pair that is most affected by the news, and analyze the strength and direction of the influence of this publication on the price change of the instrument you are interested in.
You don't have to be an experienced professional to trade on the news. You just need to be able to analyze historical data.
If you choose the wrong time to trade, you can suffer significant losses. The market behaves unpredictably when important macroeconomic data are released, and also reacts to political events in the country. In order to minimize the risks associated with the release of news, you need to follow the schedule of publications and understand how important the published indicator is.
The big drawback of fundamental analysis is its complexity. For a thorough analysis, you need to track a huge number of macroeconomic indicators and understand how they affect the market. The main difficulties arise when these indicators overlap. To be successful, you need to understand the weight of each metric.
It is unwise to ignore fundamental analysis and rely entirely on technical analysis. Of course, you can make money using only technical analysis of the market, but it is better to use both methods in conjunction. Without knowledge of fundamental analysis, you will not be able to realize your full potential in the Forex market.
Article last updated: 2022-05-11
Recommended to read
What is technical analysis?
In order to earn on Forex, each trader strives to make as many profitable trades as possible. But how can one predict where the price will move? How do you determine market sentiment? One of the methods for predicting the price of an asset is technical analysis.