As you already know, all Forex trading strategies are founded on a particular type of analysis. Those are technical and fundamental analysis – professional traders may rely on both types.
Even though both types are readily available to traders, the Forex market is mostly crowded with systems based on technical trading/analysis. This often leaves fundamental analysis to those that want to improve their trading skills.
As such, we prepared this article for those that wish to know more about Forex market fundamental analysis and its principles. Let’s begin!
What Is Fundamental Analysis?
In short and broad terms, fundamental analysis implies the analysis of a security’s intrinsic value. Namely, it makes traders look at both qualitative and quantitative factors that affect the values of certain currencies.
The core principles of technical analysis offer traders everything they need to know to read a chart and start trading on the market. On the other hand, fundamental analysis requires more research, more values, factors, and characteristics of the same asset before trading.
What Is the Purpose of Fundamental Analysis?
Fundamental analysis and the research implied by it come with the sole purpose of understanding why the prices move. Traders with a fundamental approach don’t try to predict future trends based on past ones. They analyze every part of the asset, so to speak, and try to determine what makes it move and why!
Naturally, because fundamental analysis requires a lot of information – values, factors, characteristics – it is often labeled as difficult.
The Importance of Fundamental Analysis
Many Forex trading authorities call this type of analysis as the pillar of good reason investing. Almost all professional investors have fundamental analysis incorporated in their trading strategy.
On top of that, unlike retail traders, institutional traders will always base their strategies on this type of analysis as well. But why?
- Forex trading is often influenced by supply and demand. Given that fundamental analysis researches the values and factors that influence currency demand and supply, traders can gain an advantage from using this type of analysis.
- This in-depth analysis of the Forex market can also provide traders with a boost compared to those that stick only to technical analysis.
- Moreover, thanks to this analysis of the supply and demand factors, traders relying on a fundamental approach are able to spot profitable trades that most technical strategies would miss.
- Last but not least, it is believed that the information provided by fundamental analysis is often better in terms of risk management. If a trader knows why prices increase or decrease, they’ll be able to analyze a trade from an emotional standpoint and decide if it will be beneficial for their portfolio.
The Bottom Line
If the above sounds a bit complicated, don’t worry – that’s a common statement. Even Forex trainers try to stay away from fundamental analysis when training newbie traders. Why?
Well, leaving aside its complexity, most people believe that the Dow Theory – the foundation of technical analysis – contains everything there is to know about economics. As such, fundamental analysis is not needed.
Naturally, they are not correct. While technical analysis has its benefits, it also comes with downsides that can be easily taken care of with the help of fundamental analysis!