Forex Lesson 8: Fundamental Analysis

Fundamental analysis is an extra tool that a trader can add to their toolbox to use in conjunction with technical analysis. It would never be recommended to use fundamental analysis by itself without any further information but when used in conjunction with technical analysis it can be an informative and useful resource. Fundamental analysis is derived form evaluating the world markets and scrutinising world events to see what impact they have on the economy.

Commodities play a big part in influencing currencies and economies. By closely following trends in oil we can calculate the impact on world currencies and form a fundamental analysis based on this information. If the price of oil went up we would know that economies that rely on importing oil would be affected adversely whereas those who export oil will benefit. This would form a good basis for fundamental analysis when looking at the CAD/USD. The initial fundamental analysis can then be supplemented and enhanced with technical analysis of the charts in order to make a well-informed trade.

Oil is a particularly useful commodity to watch when looking for fundamental analysis for some currencies. Large industrial nations’ currencies such as the USA, Japan and Canada are greatly affected by the price of Oil. The USA and Japan rely on imported oil and suffer when prices rise whereas Canada exports oil and benefits from higher prices. The price of oil has a big impact on other industries such as transport, which in turn has an impact on the economy and is worth keeping an eye on when trading currencies.

Other commodities that affect currencies are Copper, Iron and Steele, this is particularly noteworthy when following the AUD or NZD. Elections can also have a huge impact on currencies with a typical focus on employment on the economy providing a useful basis for fundamental analysis. In recent years in the UK the housing market has had a huge impact on the economy with rising house prices inflating the GBP to previously unseen heights.

When looking at fundamental analysis it is a good idea to look at the reasons why a the economy is being affected, for instance what is influencing the price of oil at the moment or why did the UK housing market soar so highly? To understand the reasoning behind market economy it is advisable to stay up to date with current affairs and have a god understanding of how they affect the global economy, in particular the currencies you are interested in. A good place to find useful economic information is in reliable financial publication such as The Financial Times. Reliable news sources such as broadsheet newspapers with dedicated money sections and news programmes such as the Channel Four news are also good sources of economic information. However, it is not generally recommended to place a trade directly after a breaking news event. It is more favourable to let the market settle after the initial volatility then to place a trade with a more stable market, once again it is always a good idea to combine fundamental analysis with technical analysis rather that simply relying on fundamental analysis for an accurate picture of the market.

Once an informed picture of the market has been gained using both technical and fundamental analysis it is important to place a trade with a beneficial entry point. The entry point is crucial to a successful trade. When placing a long trade it is advisable to place the entry point as close to the point of support as possible, otherwise you risk being stopped out too soon. Similarly short trades should be placed as close to the point of resistance as possible allowing the maximum amount of profit to be achieved.

Long-term fundamental analysis can be based on a period of months or years. To understand the trend it is important to analyse the charts regularly looking at the movement of the chart particularly for points when the trade nears the points of support or resistance Trades that are placed with a fundamental analysis basis can also be carried on for months or years with profits taken out at any time as the market fluctuates according to fundamental influences, these trades are known as carry trades. Carry trades are susceptible to margins as with any trades. There is a fluctuation in the range of margin administered, this can vary between 1-5% with some brokers requiring higher margins for long term carry trades.

An important point to bear in mind when looking at fundamental analysis is that the market will not always act as you would expect it to. Common sense would dictate that after good news the market would go up and improve, however if the good news triggers a sell position and the opposite to our expectations happens a number of things may have occurred to cause this. It could be that the market anticipated the good news and had moved up in anticipation of this news or that the new price wasn’t as good as the market expected, once again triggering a sell position. The opposite can be said of news that has a negative impact on the market. On the receipt of bad news we would expect the market to fall and a sell position to be adopted, if this doesn’t happen there could be a number of reason behind this. There may be unseen factors that are causing the market to go long, if this is the case it is advisable to continue looking at fundamental analysis for events that may encourage the market to go long. As mentioned earlier it is never a good idea to initiate a position immediately after breaking news but more recommended to wait to see how the trend develops and to let the trend be your friend.

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