One of the most popular ways of predicting the price behaviour of an asset in the forex market is fundamental analysis. It is often put in opposition to another popular form of Forex analysis - technical analysis, which, however, does not prevent you from using them both together.
Fundamental analysis is a study of price movements by studying economic, financial, international and other fundamental factors, their interrelations and influence on price movements.
Principle of Fundamental Analysis
Fundamental analysis is based on the notion that currency prices in the Forex market are a reflection of supply and demand, and that they are determined by economic fundamentals. This is a key distinction between fundamental analysis and technical analysis, where the emphasis is on the study of price history and fundamental factors have no bearing on supply and demand in the market. Fundamental analysis is especially popular with long-term traders, as it takes into account macroeconomic and political events and their implications, which are not published more than once a week. At the same time, it is practically useless for short-term trading, except for trading on the news, and does not account for short-term market fluctuations.
Fundamental analysis takes into account various macroeconomic parameters, major political events, rumours and news related to economic themes, and market crowd behaviour affecting price movements and provides forecasts of future price movements, exclusively for the purpose of long-term investing. Such trading usually takes at least three months.
The main drawback of fundamental analysis is its complexity because the amount of fundamental factors can be counted in dozens and it is not that easy to analyze all their interrelations. This is one of the main reasons why only 10-20% of traders use it.
Before you start using the fundamental analysis you should study the asset you will trade and all economic events, related to this asset. Also, the economic calendar is a convenient tool for fundamental analysis.
Fundamental factors
Fundamental factors, which influence market changes, are divided into the following groups:
1. News
2. Indicators
3. Market indices
Fundamental analysis is centred mainly around central bank interest rates. Many other fundamental factors are also taken into account, such as GDP (gross domestic product), inflation, economic growth intensity, industrial production indices, industrial orders, retail sales, credit volumes and many others.
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