How can Fundamental Analysis help you trade better? Well for starters it will make sense when prices become more volatile. Let's assume you understand the Basics of FX and want to continue with Fundamental Analysis the first thing you need to know is how to use an Economic Calendar. Also, when you talk about Fundamental Analysis make sure you understand the terms of demand and supply. Fundamental Events are occurring on daily basis and some proved not to be as volatile.
What is Fundamental Analysis?
Going by definition, the Fundamental analysis is a way of viewing the forex market by analyzing social, political and economical forces that can affect the market. Also, events such as Interest Rate Decisions, Non-Farm Payrolls, Trade Balance and Gross Domestic Product have an instant market reaction.
During such events, assets can gain or lose value in a dramatic way and its called VOLATILITY. However, on many occasions, traders lost money even though the announcement was positive traders missed the entry point. So to summarise traders took a gamble if to BUY or SELL and lost money or broke even. The explanation is that the market moved so fast that traders didn't have time to react. The most dangerous approach when trading on volatility is to get a wrong Fundamental Analysis reading. Also, every time you access an Economic Calendar make sure to check Previous data and Forecast data. Other major fundamental events are Central Banks meetings or Crude Oil Inventories. However, to fully grasp the meaning of Fundamental Analysis you have to go beyond terminology.
Fundamental Analysis and Currency Pairs
Currencies are traded in pairs, Base and Variable and most often Fundamental Analysis can show movements regarding one or both currencies. Assuming we are looking at the pair EUR/USD, the first "EUR" is the Base and the second "USD is the variable. Meaning that 1EUR= 1,xxxUSD. How is the economy announcements impacting the trading pairs? If we use Fundamental Analysis we can read data for both the US and EU. Let's assume we have only one announcement for the EU zone and previously was positive and forecast for better results. Similarly, before the actual data will be published, traders enter their positions. So if we have a previous positive and a forecast positive we are expecting EUR to gain in value. However, if the actual data comes out equal or below the forecast EUR will lose in value. Finally to give you a perspective, entering a long position is RISKY since you don't know if the actual data will be positive or negative. That's the most common mistake for beginner traders and that's why trading on volatility is a BAD PRACTICE. Traders will always look for shortcuts but unfortunately, too many are gambling instead of trading. That said if you apply Technical Analysis your prediction might have a better outcome for the trades you're about to place.
