Does Fundamental Analysis Work?

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.

Good point and a worthy clarification. But even this process with business values is not easy to perform, One is lucky if one can get such detailed and accurate comprehensive information from a company - and then try to place a value on commercial assets, machinery, patents, contracts, etc. But even if/when one can, that is still only half the story in that it only highlights a possible undervalued share price in static terms at the present moment in time. Investors in shares have the same motivation as forex traders (or any other traders) - that they only buy or sell when they believe the future price/value will be different than what it is right now.

For this reason, an undervalued share price might also be a dynamic indication of a perception that the company’s current value is falling due to, for example, aggressive competition, price wars, new legislation, etc and that the value will come to the price rather than price to the value. Speculation is always about where the value will be “tomorrow” compared with where it is “today”.

But I can also, at the risk of revealing my age, say that I really struggle nowadays to understand the value of a company in this traditional sense when I think of companies like Facebook, Rovio and Google. I have absolutely no sense of “value” regarding these types of businesses whatsoever!

So, yes, fundamental analysis is definitely a process than is beyond even being an art let alone a science :confused:

But one interesting consideration with trading is that most people wish to backtest their methods to prove their performance but I suspect very little such testing actually takes into account anything other that pure price movements - how can fundamental analysis be applied in that kind of testing?

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You and me both.

All the more so, here: I’m older than you. (I’m older than everyone here, I think.)

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Are you sure about that? There is, or was, an excellent example recently of never being too old in this industry:

I hope he is still around, but he hasn’t posted for some time, I think…

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Till now I avoid all of major news events without NFP! I use sending order strategy on NFP.

Two major types of analyses are becoming popular among the forex trader: fundamental and technical analysis. Fundamental analysis helps a trader to determine the intrinsic value of a currency by analyzing various fundamentals like inflation, economic growth, interest rate, etc. of the nation whose currency we are trying to evaluate. However, with inappropriate trading knowledge and skills results of FA can’t b interpreted properly. Traders will require adequate knowledge and skills about forex trading.

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@TradingBull666, have you tried using a news gun to trade the news? I have not but I have seen some impressive results with one.

I do trade news after the spike.

A news gun? Sounds quite cool.

@TradingBull666, I have not used it, I took a little $10.00 course on how to use it that was good with more examples than you can shake a stick at. But when I went to download the widget it was broke/not available. I receive a message from time to time to sign up but haven’t taken the time yet.

You can not neglect the fundamental analysis as many experienced traders always stick to the basics. I would recommend you stay as simple as possible as it is really difficult to analyse the market technically but if you have the grip on the basics then it will be easier for you to gain profits.

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I’ve seen people claim it works for them, and it probably does. I, personally, prefer technical analysis.


We are traders; we trade in a zero-sum game.
We can only win if the market has price action, up - down - sideways.
Fundamentals cause sentiment.
Sentiment causes momentum.
Momentum causes trends.
The technical’s report on past trends/patterns/cycles in the hope that we may gain insight into the future.
As traders, we are not, or I am not a long-term investor tieing up large sums of cash for drawdowns or potentially huge losses from stop losses.

The expression, “Trade what you see.” is trading Momentum. All the rest is fluff. A trade is planned, entered then its all about trade management and cash management.