Whenever people mention fundamentals, they talk about the economic fundamentals of a currency’s host country. Economic fundamentals cover vast information – whether in economic, political, or environmental reports, data, announcements, or events. Fundamental analysis is the use and study of these factors. It is the study of what’s happening in the world and around us, economically and financially speaking, and it tends to focus on how macroeconomic elements (such as the economy’s growth, inflation, and unemployment) affect whatever we’re trading.
Fundamental Data and Its Many Forms
Fundamental analysis involves studying economic trends and geopolitical events affecting currency prices. In other words, it studies financial news and economic data.
The most important economic data to watch for include:
✅GDP (Gross Domestic Product)
When a piece of economic data is released, fundamental analysis provides insight into how price action “should” or may react to a particular economic event.
Fundamental data takes shape in many different forms.
The release of this data to the public often changes the economic landscape (or, better yet, the economic mindset), creating a reaction from investors and speculators. There are even instances when no specific report has been released, but anticipating such a report is another example of fundamentals. Speculations of interest rate hikes can be “priced in” hours or even days before the actual interest rate statement. Currency pairs have been known to sometimes move 100 pips just moments before major economic news, making for a profitable time to trade for the brave. That’s why many forex traders are often on their toes before specific economic releases, and you should be, too!
Generally, economic indicators comprise a large portion of data used in fundamental analysis. Like a fire alarm when it detects smoke, economic indicators provide insight into how well a country’s economy is doing. While it’s essential to know an indicator’s numerical value, the market’s expectation of that value is equally important. Understanding the resulting impact of the actual figure in relation to the forecasted figure is the most important part. These factors all need consideration when deciding to trade.
Fundamental analysis is a valuable tool in estimating the future conditions of an economy, but not so much for predicting currency price direction. This type of analysis has a lot of gray areas because fundamental information in the form of reports, economic data releases, or monetary policy change announcements is vaguer than actual technical indicators.
Intermediate or medium traders and some long-term traders like to focus on fundamental analysis, too, because it helps with currency valuation. We like to be a little crazy by saying you should use BOTH!
Technically focused strategies are blown to bits when a key fundamental event occurs. In the same respect, pure fundamental traders miss out on the short-term opportunities that pattern formations and technical levels bring.
A mix of technical and fundamental analysis covers all angles. You’re aware of the scheduled economic releases and events, but you can also identify and use the various technical tools and patterns market players focus on.