Trading in the forex market using technical analysis alone is not ideal, an understatement. It can lead to improper placement of orders and, most of the time, a lack of deep understanding of price action developments which can harm the decision-making process. Fundamental analysis is a must in this equation, mainly because it helps paint a bigger picture of why market participants are buying or selling any currency at any point in time.
If you’re new to the field of FX, here are four key points to follow to integrate fundamental analysis properly into your trading regime.
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Principle #1 The markets are always forward-looking
The consensus is already built into the price. This means market participants are looking at the latest economic data and trying to anticipate what impact this data might have on readings due to be released in the future. This is the main reason why even though right now GDP figures, industrial production, and retail sales show positive improvements, the overall sentiment in the FX market is negative.
You need to know that the focus is currently on geopolitical tensions, making it hard to comprehend the global economic impact over the upcoming weeks and months. As a result, flows are going into safe-havens like the Swiss Franc or Japanese Yen.
Principle #2 Capital flows impact economic activity
When capital enters an industry, growth prospects rise. So understanding capital flows should also be part of your analysis routine and can be done quickly by monitoring interest rate developments and spreads between short and long-dated rates.
This beginner’s guide to forex helps understand basic principles. Yet, if you want to take your trading to the next level, it would be appropriate to learn more about credit markets’ mechanics.
Principle #3 Rules-based approach to news trading
Currency volatility tends to spike when important economic releases like a Consumer Price Index (CPI), unemployment data, or Gross Domestic Product (GDP) reports are published. However, news trading will often be challenging if you act on impulse, buying on a positive figure or selling on a negative one.
It might take a more extended period for the market to digest the news. This can also sometimes blend a specific news event into a bigger context, which leads to situations when markets go up despite negative headlines.
Principle #4 Focus on the interpretation of fundamentals
Removing subjectivity is one of the most difficult, challenging tasks you need to face. This is not only with technical analysis but also with how you interpret economic indicators. Don’t base positive or negative personal opinions. Leave that aside and focus on the market reaction. The price will tell you how most participants view certain economic developments, and you need to act based on that. Especially if you are a beginner, it would be better to follow the dominant trend and not try to make tactical movements.