A Role Of Fundamental Analysis In Forex Trading

All Forex trading courses and training materials always include two large sections: fundamental and technical analysis of Forex market. According to our researches, we came to the conclusion that it is necessary to know about the fundamental analysis, but its role in successful trading is exaggerated.

Let’s discuss the basics of fundamental analysis. The main target in fundamental analysis is to predict new trends in price movements. Life cycles of the fundamental factors can be divided into short and long. Short life cycle of an event lasts no more than a day and sometimes even less than an hour and includes all unexpected economical or political news and events. Very often this news is associated with force majeure like earthquake, terrorist acts, etc. Long term cycle lasts from several weeks to several years. Fundamental factors of long-cycle are all factors that affect the global and national economy situation (inflation, unemployment, etc).

The bulk of the traders in Forex market are speculators. It applies to both small traders and banks. The main difference between a speculator and the investor is the duration of time he/she stays in the market. If you have brought EUR in February and sold it in May – you are an investor. But we don’t have many traders like that. Most traders perform transactions within days or maximum within a week when they close trading positions before a weekend. Accordingly, the fundamental factors of long life cycle for such traders are not very important.

When talking about the fundamental factors of a short life cycle, it is still difficult to see their importance. If it comes to natural disasters, you need to be quick enough to open a trading position in a right moment, because in most cases you will miss the moment. When it comes to expectations of news, it also looks complicated. As an example let’s consider the unemployment rate announcement in USA. If the news will coincide with the predicted value, it is unlikely that the USD will change.  Means that you will have a trading opportunity only when the news doesn’t coincide with the expected one. The question you have to ask yourself whether it is better to buy or sell when there is a difference between the actual and expected announcement.

Fundamental analysis will not let you decide when to open a trading position. Making decisions basing only on fundamental analysis is extremely difficult, as you have to handle a huge volume of information. Besides it will take you much time to read all reports, news and briefs. 

To sum it up, on our opinion a trader needs to have a handy economical calendar of important economic events, but only for avoiding opening a trading position before the announcement of big and important news. Because it may cause high volatility of the market and prices will move unpredictably before a trend will take a direction. The market may sweep your stop orders by closing your position and then return to its original level.

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