The topic of investment advice slowly dries out, which is not that surprising, considering the fact that investing seems to be quite easy in comparison to actual trading. So today we will dip our toes not only into covering the basic aspects of trading, but we will also start preparing for the implementation of Forex trading.
The world of Forex is so vast and there is just so much stuff to talk about, but if there was to be a “trading world”, the fundamental and technical analysis would be its hemispheres. Today we will talk about the fundamental side of things.
Two ways of looking at Forex
When working in the Forex market, traders, as a rule, use two types of analysis — technical and fundamental. The main purpose of technical analysis, or better known TA, is to analyze the graph using mathematical methods and principles. Fundamental analysis, on the other hand, includes political and economic indicators, as well as financial and credit policies of countries all around the world.
The main difference is the approach to pricing on the chart. The adherents of technical analysis believe that you should only analyse the current factual prices since they already contain all the necessary indicators and reasons for the price change. TA evaluates investments purely on the market activity surrounding them, with no looking to the actual operations or value of the company itself.
However, fundamentalists argue that prices depend on economic factors and are indicators of supply and demand. You can say that TA analyses prices, while FA analyses the trading instrument itself, and the end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security’s current price, thus indicating whether the security is undervalued or overvalued.
The fundamental analysis considers phenomena in political life, economic macro- and micro-indicators not only of countries individually but, also the world community as a whole. These events affect the foreign exchange market and lead to a change in the exchange rate. As a rule, fundamental analysis is used to predict the movement of currency pairs for an extended period, while technical analysis is used to operate within shorter timeframes.
Economic news reports often spur strong short-term moves in the markets, which may create trading opportunities for traders. Announcements about corporate profits, a change in management, rumours of a merger, are events that can cause a company’s share price to change drastically. Such changes can be very short-lived and last only a few minutes, but traders that use FA thrive off such events.
The main disadvantage of this type of analysis is its complexity. To determine the trend, it is necessary not only to be able to identify the factors that can affect the trading instrument but also to predict all of the possible scenarios. In addition, under different conditions, the same macroeconomic and political factors can affect the foreign exchange market in different ways. Simply put, what worked last year may not have any effect on supply and demand this year.
Since most operations in the foreign exchange market are pegged to the US dollar, data on the economy of this country have the most significant impact on prices. Among the most important fundamental factors are the GDP of different countries, indicators of unemployment figures and the number of jobs outside the agricultural sector, as well as speeches by the head of the US Federal Reserve, the head of the Federal Open Market Committee and the heads of central banks of different countries, etc.