In the Forex market, there are 3 main schools of analysis: Technical analysis, Fundamental analysis, Market sentiment analysis. In today’s article, we will learn about the school of Fundamental analysis. This is one of the trading methods in Forex revolving around news and economic data.
What is Fundamental Analysis?
This is a trading method based on economic, social, and political analysis. It helps to identify the effects on the supply and demand of some currencies, commodities.
This is the study of what’s happening in the world and around us. And it usually focuses on macroeconomic impacts such as economic growth, inflation, and unemployment. These factors influence trading.
The data of fundamental analysis
Fundamental analysis provides a clear view of price action against the current economic event.
Basic economic data takes many forms. It could be a report published by the Fed on current home sales in the US. Or it is also possible that the European Central Bank will change monetary policy. The results of this data often change the economic environment, generating a reaction from investors to speculators. An interest rate hike can be predicted for hours or days before the real announcement about the interest rate.
In fact, currency pairs sometimes move 100 pips before important economic news is released and make the time for profitable transactions. That’s why many Forex traders are usually ready before the economic report is released. And you should do it too.
In short, data is made up of many economic indicators. However, you need to consider these factors before making a decision during trading.
Fundamental analysis is a valuable tool in predicting the future economy. But it doesn’t predict too much about the current trend of the price. This type of analysis has many gray areas because basic information in the types of reports, economic data, etc. is more confused than indicators.
Markets often react based on traders’ perceptions through economic reports. Or it is based on their assumptions about current market conditions. There are many people with many different feelings and ideas. And we have no way of knowing exactly where the currency pair is going through some new fundamental data. However, this doesn’t mean that you should skip fundamental analysis.
Many people have difficulty grasping the basic amount of data. Most basic data reports only on a single currency. The basic data on other currency pairs is also necessary and should be compared to see the overall image. As we said above, everything has to do with the strengths and weaknesses of currencies.
No method is absolutely perfect. Therefore, if you choose the school of fundamental analysis, you should learn them carefully. Always have your weapons ready before fighting.
Ending part 1 here, hope to see you in part 2 and part 3. We will share about technical analysis and market sentiment analysis.