It is time to explore what it really means to look at fundamental analysis and how it works in the Forex markets. Many people claim that they want to practice good fundamental analysis when they are conducting their trades. With that in mind, we will now explore what it means to look at the economic fundamentals of a country’s currency.
Overall, economic fundamentals is a very broad category of study. There are plenty of people who look at things such as economic turmoil in a country, political news, environmental reports, and so much more. It is all about getting accurate information about the state of the country as it stands today.
The various economic factors that influence a country also tend to have an influence on the pricing of their currency. That is to say that when news comes out about the strength or weakness of a particular country’s economy, you can bet that it will have a direct impact on how that country’s currency is able to sustain itself.
Fundamental Data Comes in a Variety of Forms
There is not a specific figure or set of figures that one can point to and say definitively that is what fundamental data is. Rather, there are a whole host of different pieces of information that may serve this purpose for those who are looking for the most important factors that play a role in a dynamic and fluid economy. Thus, it is obvious that you need to look at the full scope of fundamental data that comes pouring in so that you can more fully understand what you are potentially looking at in the market.
A few of the most important pieces of fundamental data include the following:
- Interest rates
- Inflation numbers
- Employment numbers
All of these factors play into the overall health of the economy, and that is an important thing for all market participants to keep an eye on. The way that fundamental data appears on the doorsteps of traders can take a variety of forms. For example, it may appear as a housing report from the Federal Reserve. Alternatively, it could show up as an interest rate adjustment (made by that same governing body).
No matter the specifics of the type of data that one is looking at, the important thing to remember is that every piece of fundamental data that comes out in the news has a potentially important role to play in the way that traders evaluate the market. One more important thing to note while thinking about this topic is that many of the pieces of fundamental data that do arrive in the market are already “priced in” to some extent. That is to say that traders will attempt to anticipate the numbers that are going to arrive before they actually do. If they are correct in their assumptions, then it is entirely possible that they will profit significantly from those numbers.
The Expectation Game
It is certainly the case that it is important to know what the numerical value of a particular piece of economic data is when it hits the market. However, it is also important to understand what the market expects that piece of data to be. In other words, it is ideal to not only anticipate the number itself, but also what the market believed that number was likely to be. When this is done well, it may be the case that one can trade off of the expectations game just as effectively (if not more so) than going simply off of what the number turns out to be.
Fundamentals play a major role in determining the future price action of the currency pair in the long run. However, there are many who say that it is not as effective at helping them sort out where the current pricing action is likely to move.
What to Do Once You Receive the Report
You have reached the point where you have the economic data that has been released, but what are you supposed to do with it now? This is precisely the kind of question that newer traders ask themselves all the time. They legitimately want to know how they can reshape the way that they use information received from an economic report to reform their trading in a positive way.
The most important thing to understand with this type of data is the fact that you can’t solely rely on economic data to tell you where the market is likely to go in the coming days. However, you shouldn’t completely dismiss this type of data either.
Technical analysis is also required in order to make the best trades. Technical analysis is the preferred method used by short-term traders. Meanwhile, medium- to long-term traders are often most interested in how they can use fundamental data to help inform and improve their trades. There is nothing wrong with taking either approach.
Using a mixture of both fundamental analysis as well as technical analysis is likely the best way to go about things. It can help you find the happy medium that you need to be an effective trader. As long as you remember why you are trading a certain way and how you can approach the market with a useful system, you should be all set and ready to go.