Does Fundamental Analysis Work?

I used to believe and try to use news from financial/trading website and after a few years results-oriented conclusion. I realised that most of news/analysis are adverse to the real future trend. Do you guys think so?

I don’t watch the news cause it’s controlled media. This works on many levels. Perhaps even at the financial aspect of it. Also if it’s on the news, chances are it’s old news. Meaning if you watch it at 6pm eveynight, the next 23hours tick by and it’s all ‘old’ stories now bearing on the true present (obviously this doesn’t apply to everyone and it all news outlets)

It’s once again a double edged sword. News is a persons (scripted) account of an event. Who’s to say the ‘news’ whether in it entirety or just a single report is the truth? (<<< think for yourself)

Obviously there are certain bombshell accounts that shake the economy and it’s actually happening. But not every news report will shape the flow of the charts.

I mainly use technical analysis but before placing a trade I still check the news of that pair and just have a look and see if anything stands out.

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Yes good fundamental analysis does work. It does have one major problem. Its not precise. So if the FA indicated that a currency would increase in value it may very well do that. But first it may go down, then up, then down by a large amount then up again etc. Ultimately closing at the end of the week, month or year higher, just as the FA predicted.

The problem is that for a trader to take a leverged position and ride out all of the ups and downs the stoploss would have to be very wide. This has the effect of significantly increasing risk. Technical analysis on the other hand is more precise and as such, reduces risk (assuming same position size).

Most profitable traders use both. Fundamental analysis to help establish a market bias and technical analysis for a more precise entry and exit.

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I trade long-term and almost only with established trends. Maybe a long-term trend is the ultimate expression of the power of FA, but I certainly don’t need to watch news or even do FA research. I generally ignore high profile news events on the calendar like NFPR’s, interest rate decisions etc.

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Yes, these types of news events are so challenging! It’s not easy to make consistent money during NFP, FOMC. I also avoid 1 hour of any major news event.

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Fundamental analysis comprises the understanding the total economy. It is not just the economic data. Market moves according to the all statistic graphs. You have to judge any data release as whole. That’s the reason fundamental analysis is more complicated than technical analysis. You should have sound knowledge on economics.

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That’s so true; this is why; maximum traders are trading with the technical (major) analysis.

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It is important to differentiate between the FA data itself and the commentary on the data. The FA data is fact but the commentary is second-hand conjecture built mainly upon sensationalism rather than serious analysis. The problems are mainly that:

  • Data releases are already historical when they are given and even subject to revision in the subsequent release. Therefore we are looking at the future through the rear mirror.

  • The overall fundamental condition of a currency is rarely changed by one release and not all releases will support the current view. Therefore it is necessary to weigh the current specific news in the context of the overall trend.

  • Currency pairs are not just one currency, but two. Therefore the fundamental factors currently affecting one of the currencies may well outweigh the impact of a specific data release for the other. This introduces a subjective quantification into the assessment of what the relative impact may be on one currency with respect to the other.

  • The relative value of any given currency/economy normally reacts to changes in underlying fundamental factors over a prolonged period of time, even years. Changes in productivity, inflation, wages agreements, industrial structure, governmental fiscal and monetary policies, environmental pressures, etc, etc, do not reverse on one data release. Of course, there are rare events such as that by the SNB that can change a situation in an instant, but that is very rare (and totally untradeable since we are not normally unaware of it beforehand).

For these reasons (and others) serious trading based on fundamental analysis can only realistically be on a long term basis. Short term trading based on so-called “fundamentals” is actually just trading reaction to individual news events. This is really gambling rather that any kind of serious analytical analysis of future direction.

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Two charts illustrating the comments of Traderjohnsblog, tommor, and Manxx

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Obviously analysis are helpful. And I wanted to say any sort of analysis fundamental or technical if it is done properly then it will definitely helpful for forex trading. But the news from financial or trading website, I don’t think it works. Because this sort of news are controlled with different things. But with own or from trader fundamental analysis it will help you to understand the rises of particular currencies or fall.

Often fundamentals “drive” price and the techs exercise “control” on that drive - and in the short term.

Most recent example is Eur/Usd yesterday, price broke last week’s high early Europe - then continued up.

One could argue that this is keeping with the long term trend driven by fundamentals and that TA rules apply on the break.

Then again a speech given by Jens Weidmann re ECB QE and bullish Euro in tone happened to coincide with the break, a FA follower would argue that the speech was the ‘driver’ and the techs the controller.

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Nicely put! :slight_smile:

The difficulty is also in identifying which fundamental factors are currently predominent in driving prices. These factors are not just the economic conditions in a currency’s home nation. They are manyfold and often even contrary in their impact on a currency. The obvious example is the USD which is a global currency and not just a USA domestic currency.

The USD value may be simultaneously affected by a miriad of different forces often pulling in opposite directions. Some examples might be current Fed/Govt policies, changing volumes of global commerce priced in dollars, investment portfolio movements of funds into/out of commodities, Int’l companies creating/moving production units around the globe chasing after cheaper labour cost, decisions on whether or not to repatriate profits, etc, etc.

Although these fundamental activities are what drive the price, the problem is exacerbated by the fact that no one can possibly know what is the net effect of all these various factors at the present time or in the future or with respect to factors affecting other currencies. We can only analyse the recent and not-so-recent past and extrapolate into the future.

FA and TA are both looking at the same thing: Price - where it is, where it was, and where it might be going next. But the difference is that the fundamentals collectively drive the price movements whereas technical analysis simply watches the cumulative impact of all the fundamentals.

A currency pair is a bit like the big motorways that ring many big cities. They are filled with traffic going in both directions. No one knows all the individual (fundamental) reasons why each and every vehicle is there at any one time or why it is going in a particular direction but there are factors such as rush hour that can be identified as collectively significant and predictable in their impact. On the other hand, technical analysis is more like just watching, monitoring and measuring the motorway traffic flows through CCTV and deriving conclusions when traffic flows are most dense and in which directions - without actually needing to know why (although knowing that is a big benefit).

In essence, technical analysis should not have any driving or controlling impact on prices as it is purely intended to show what is happening now relative to what has happened earlier. But nowadays when TA is so prevalent and so easy to apply through trading platforms and taught by so many sources, we find that many technical “points” are identified by a huge number of traders and concentrated down to even one pip. S&R lines and trend lines are typical examples, even Fibonacci levels and pivots.

This results in a large number of traders entering a market at a similar time and in the same direction and creates a short term surge in price as a result - such as a breakout through a well-identified level. But although the TA may be the cause of this surge, it does not/cannot predict how long it will continue before profit-taking starts and fresh entries dry up. In fact, TA cannot explain why sometimes levels hold and then eventually they do not.

If TA were to be the only force to drive prices then we could imagine that we would eventually become confined within a set of support and resistance levels for the rest of eternity…in fact, since most traders place their orders inside of S&R levels then these levels would gradually move towards each other until price no longer moves at all. …that is, if there were no fundamentals!

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Fundamental analysis is a holdover from the early days of stock trading. A company has a literal value: you can add up the price of all the factories, patents, contracts, etc, held by the company, deduct the liabilities, and divide by the number of shares. That is the true value of each share if the company were to close down that day, because that is the amount that each share would receive after the assets were liquidated and the liabilities settled. Price will tend to return to this value (outside of bubble conditions), so buying (or selling) when price deviates from this value is a reasonable strategy.

Or at least, it was before governments started printing money.

But that’s not how it works in forex. Countries don’t wind up and liquidate their assets; they collapse. Ask the Venezuelans. Unlike trading stocks, we are not trading literal value, we are trading demand. And demand is psychological, not fundamental. Instead, it is based on the perception of fundamentals of those currently in the market.

So learn to trade the psychology of crowds, not the fundamentals. Stephen Bigalow, one of the top candlestick traders, says that price action reflects the collective wisdom of the markets. There is no point in being right about what price should do; you need to be right about what price actually does, and that is driven by the perceptions of the market participants.

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This is exactly right (as is all the rest of Drekieyja’s post, of course).

I’m also aware, after decades of experience, that as a retail trader, fundamentals is in any case an area in which I can’t possibly seriously compete with the biggest players in the market, who spend millions studying, researching and analyzing it.

I can turn technical analysis to my advantage, though, in ways in which my comparatively small volumes are unnoticed by and irrelevant to the big players.

I can’t realistically hope for a fundamentals-based edge or guidance at all.

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[quote=“LaughingCharlie, post:14, topic:142439”]
…the biggest players in the market, who spend millions studying, researching and analyzing it. [/quote]
And, one might add, still don’t always get it right either…

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A combination of FA and technical analysis is the key! =)

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I agreed with you. And I hate to watch the short news which can drive me crazy without any help.

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Excellent reply. And I can not agree with you more about the longterm effect and the noise from commentary. The fundamental analysis is a vast work and very hard to put to use with precise, I think, at least for me.

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People vary in their approach, then. That isn’t true at all, for me.

I’ve increasingly noticed, over the years, that that tends not to be true for those of us who’ve survived for decades: I think the more experience you have, the less relevant fundamentals tend to be for you, for forex trading.

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Excellent point. It is very important to understand the difference between data and commentary on the data. Although both can move the markets its data that forms the FA.