Fundamental analysis in Forex market
Now it is time for us to learn some of the kinds of strategies there are for trading in FOREX market. Analysis is the impartial and logical conclusion about the possible future behavior of the instrument we are interested in trading.
There are generally two types of analysis – fundamental analysis (FA) and technical analysis (TA). Their variance is simple: fundamental analysis studies causes and the technical analysis studies consequences. Fundamental analysis asks a question: “Why did the quotation go in X direction at N moment?” whereas technical analysis says: “If the quotation went in X direction at N moment, now it may go in Y direction”.
Both methods are valid and either of them can be used effectively. You should clearly understand the methodology of both types of analysis to be able to choose the one you are more comfortable with. It may also be that like many traders you will prefer to use a combination of the two.
Everything in this life has its foundation, a basis. For your house it is a thick layer of concrete that won’t let the building sink into the ground. For your brain power it is your education and upbringing and the books you have read including this one. For a healthy sportsman’s body it is the everyday routine of intolerable exercises and the using of healthy food. For an advanced economy it consists of efficient governmental mechanisms, and a strong manufacturing and export substructure. The Forex market is no elimination to this rule. It too has its own foundation and this is what fundamental analysis describes.
You may have already guessed what makes the base of this interesting market. The answer can be brief in one word – events. It is the several events of different economic importance occurring in the different areas of business and life that form the basis of the Forex market. Without events quotations be likely to freeze up, but when something serious happens quotations tend to jump like a flea. For instance, after World War II the German currency devaluated so much that prices in ordinary shops changed two times a day and the sum needed to pay for a purchase was weighed on scales in order not to waste hours individual bills of money. Could you predict such a move of the rate? You bet! Though this sample is not a typical one it is very obvious for us to see how the basis of a currency may collapse. Unfortunately it is much harder for a trader in the present time to perform fundamental analysis in comparison with 50 years ago.
There are no World wars anymore but there is a confusing array of many different economic events. This is mostly because of globalization.
Fundamental analysis (FA) accounts are directly dependence on supply and demand, which is naturally dependent on fundamental economic effects. There are agents that influence on currencies, but all of them are specified and one can easily drop their effect upon the quotations. Fundamental Analysis is more affective when applied to big periods of time for example a week, a month, a quarter, or a year.”
Technical analysis is built on the idea that it is unusable to look for the reasons for changes in prices as it is impossible to find the cause of the change before this cause has already affected the quotation, so it is enough to study the behavior of quotations themselves. TA is operative when working with short periods of time – from minutes to weeks.
The main weakness of FA as we have already declared is the difficulty of the world’s global economy these days. If you are good enough in mathematics and logical thinking it wouldn’t be that hard for you to associate with 15-25 different parameters and trace their interconnections concerning one fundamental indicator (FI), but unfortunately it’s hardly enough for an exact prediction.
There are about 50 different fundamental indicators for each country taking part in the Forex market. So, in order to compose more or less realistic predictions of currency rise and fall you should have either a genius mind, amazing perseverance, a decrease in the accuracy of calculations or funds to maintain your own analytical research center.
While we recognize the difficulties involved in employing FA, our conclusion is that it is an essential aspect of Forex trading strategy. Few people constantly profit from Forex, which means that a significant number of traders may be missing an opportunity for using FA, and their methods can be improved for more successful trading. So, let us be different.
Written by FxErvin