Today I want to discuss how a new and experienced traders of the Forex market alike, can begin to approach fundamental analysis in a way that can be applied immediately.
For anyone confused by fundamental analysis and how it relates to the Forex market, hopefully this post can help make things clearer, and while many retail traders assume that fundamentals are complicated there are some simple steps to follow in order to gain an understanding.
Most ‘trading educators’ teach strategies that are built around technical analysis, and often it’s believed that fundamentals are ‘priced in’, or irrelevant to them.
The simple fact of the matter is that, while many large funds and institutions might take a trade based on technical reasons, fundamental analysis is still a significant component of their strategy.
When things happen in the real world, the price of various instruments react in a manner that’s influenced by the events occurring, and this happens both in the short term, say if price is reacting to something like an election or natural event, and also in the long term which is perhaps dependant on the economy at large or ongoing political tensions. This is simply the anticipation and reaction to global or local events.
For anyone unsure about whether fundamentals apply to them or not, it’s as simple as asking yourself “Why does the market move so much during fundamentally driven events?”
In order to get started understanding fundamental analysis, you need to gather information. Now whether this is from Reuters, Bloomberg or even free sources such as Forex Live or Forex Factory, these services deliver almost real time market events as they happen.
The second step involves learning how you can interpret and apply this news. There are a couple of simple elements that you should be able to extract from these news events. The first is the currency that it applies to.
Secondly, the anticipated directional impact that the news will have on the currency.
Third, there needs to be a very clear and concise reason as to why the expectation is what it is. Ie, there has to be a catalyst event.
Finally, there needs to be a simple but clear opinion from credible sources, be they analysts, economists or traders, or just down-right switched on people.
Now, it’s time to put it into practice.
Once you start paying attention to sourcing and analysing fundamentals you’ll be surprised at how quickly you’re able to grasp fundamentals as a concept. To become even more proficient, you’ll need to put these ideas into practice by Forex trading with a small amount of real money and monitor their progress. Once this begins, you’ll in-turn start to study with more intensity, interest and understanding which becomes a self-perpetuating learning curve.
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