Beginners in the Forex market are often baffled by fast-paced price movements which are caused usually by economic news or technical reasons, but sometimes those price movements move against the result of a fundamental economic news or they turn in the other direction after a short period of time. How do we apply fundamental analysis, anyway? There are three rules to remember in applying fundamental analysis. Failure in understanding these rules might be the reason why your fundamental analysis doesn’t work.
Market always overreacts
In the course of your Forex trading, have you ever seen prices drastically move from one direction to the other? Things like this often happen around economic news releases, especially important ones like the US Non Farm Payroll (NFP). In an NFP release the market usually react first to the preliminary announcement, stating for example that NFP rouse by a few thousands. After that the second set of reports comes out stating that wages stayed flat, and unemployment rate didn’t change at all. Market participants instantly discards their initial assessment, reevaluate and act accordingly.
It is very important that every trader understand that the market always overreacts, therefore not all economic news have high impact. More than half of the events are simply sparks or noise. To handle those sparks, you simply have to understand the strength of the news release you want to trade and know how to react to the outcome of the news release.
Strong data does not equal bullish, weak data does not equal bearish
Here is where your ability to stick to your plan will be challenged. For example, you just know that the USD is strong and US related data are better than ever. However, you also find out that instead of going downward, the GBPUSD held out and then moved upward. What happened? It usually means that the GBP was fundamentally stronger than the USD at that time. Not all economic releases are important, there is a lot of minor releases that doesn’t have an impact on the price which might make you think that your fundamental analysis doesn’t work.
A strong currency does not mean that the currency will out perform other currencies in the Forex market. Remember that currencies are traded in pairs within a globalized Forex market, which mean that influential fundamental releases come from both sides as well as other general sources.
Prices are determined by supply and demand in the market, so you should not only observe fundamental dynamics of one or two currencies but other factors effecting the supply and demand in the market, such as global market dynamics and market sentiments too. Usually a trade starts with the question of what is the market concerned about now? Sometimes, it involves geopolitical tensions and natural disasters. not the common economic data releases. If an event influences stocks, commodities, and or bonds, then it will most certainly influence the Forex market. Some of them will have a limited impact, some will be more important than economic releases, they might control the market sentiment for some time.
Fundamental analysis doesn’t work without proper technical analysis
If you are unfamiliar with Forex trading, then choosing one approach shall be more prudent than trying to learn both of them. Therefore, beginners are frantically learning either the fundamental or technical analysis, not both. If you have done this, then this is where you have made a big mistake.
If price movements is a human, then fundamental analysis and technical analysis are his two feet. Learning one without the other is like trying to walk with only one foot. For a short time, you might be able to do that, but sooner or later, you will stumble and fall. Simply put, Fundamental analysis doesn’t work without proper technical analysis
Fundamental analysis makes it possible for traders to understand the growing sentiment for a certain pair and if prices are going upward or downward, but technical analysis will show traders the timing for a good entry and exit points. There are many tools to master other than technical and fundamental analysis. For instance, trading patters could give an early warning when market sentiment changes or when the price is about to change its direction.
In short, there are traders who tend to emphasize on technical analysis in their trading, but it is also important to know and apply the basics of fundamental analysis. You won’t be able to be a successful trader otherwise. You should know how to navigate around the technical analysis properly and use what you understand about the fundamental analysis as well to trade properly