There are two groups of traders: fundamentalists and
technicians. Fundamentalists are traders who use fundamental analysis to
predict price action, and technicians are traders who use technical analysis to
predict price action. Of course a lot of traders use both types of analysis.
Let’s talk today about fundamental analysis, which is based
on economic factors.
Fundamentalists assume that the supply and demand for
currencies is a result of economic processes that can be observed. So, they
observe economic, social, and political forces that drive supply and demand.
They believe that by observing all kinds of indicators they can predict price
actions.
Because currency prices are a reflection of the balance
between supply and demand for currencies, by analyzing different data, such as
interest rates, balance of trade, foreign investment, GDP and many others,
traders can predict price actions. The problem is that there is huge amount of
data to analyze. Fundamentalists can study any criteria except price action.
Different fundamental analysts look at different economic indicators, but the
most important are economic growth rates, inflation, unemployment and interest
rates. Especially data that is related to interest rates and international
trade is analyzed very closely.
Fundamentalists know when different economic indicators will
be released. They usually have calendars where they note the date and time when
different important statistics will be made public.
By learning and observing different fundamentals of the
markets we can increase our knowledge and understanding of the global market.
By doing fundamental analysis we can predict economic conditions very well. We
can also have a clear picture of general health of the economy. We will know what
is going on. Those are the reasons why we should not completely ignore
fundamental analysis.
But there are some problems with fundamental analysis.
Fundamental analysis usually does not give us specific entry and exit points, so
the trades can be pretty risky. It is very difficult to find a method of
translating all of the different information into specific entry and exit
points for a particular trading strategy. There is so much information that it
is easy to be confused.
That is why many traders use some fundamental analysis to
understand unexpected movements of the prices and to know the forces which move
them, but they use technical analysis to decide when to enter and exit the
trades.
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