Fundamental Analysis in Forex Trading: A Beginner's Guide

The Fundamentals of Fundamental Analysis

Fundamental analysis, like technical analysis, is a pillar of trading analysis. It is an essential tool for those who want to approach the market in an informed manner, for those who want to trade with a strategy behind them. It is also a very difficult discipline, which proceeds from the possession of a considerable theoretical background. It is also at the center of a furious dispute with technical analysis. Proponents of the latter, perhaps in a somewhat fundamentalist manner, tend to deny its usefulness. In our opinion, this claim lacks valid arguments, also because fundamental analysis was born together with financial markets, and its reason for existence is amply justified by its ability to withstand more or less unscathed centuries of market history. Below is an exhaustive treatise on what fundamental analysis is and how it is used.

The Principles of Fundamental Analysis

Like technical analysis, fundamental analysis also relies on principles, on more or less arbitrary (up to a point) postulates from which more particular approaches and techniques proceed. From a certain point of view, there is a certain sharing of theoretical bases with technical analysis, although at a certain point the perspectives diverge almost radically. History repeats itself. This postulate is identical to that of technical analysis, and in fact we are facing a rather solid common ground, an argument that does not give rise to the already heated controversies between the two "supporters". History repeats itself because investors tend to reiterate the same behaviors, regardless of the asset they trade or the platform they use. Similar events, therefore, are reacted to in a similar way. This postulate opens up immense spaces on the modeling front, a trend - not to say fetish - to which even fundamental analysis is fond. The market is rational. Investors have a logical and incontrovertible goal: profit. This logic is made to correspond to an underlying rationality, which sees the trader avoid - very simply - danger and pursue profit. This, in practice, is only partially true since the market, especially in this period, is very susceptible and prone to irrationality, at least in the very short term. Posing this postulate, however, is necessary to keep the ground on which the creation of techniques rests fertile. In the worst case, therefore, we are facing an ideal-typification of the market. The world is interconnected. This is the point where fundamental and technical analysis diverge. Proponents of the latter, to tell the truth, do not deny this truth; they simply state that it is useless for the purposes of studying prices: everything is already in the charts and prices "discount everything". For fundamental analysts, however, to make a play on words, the fact that investors discount "is not at all discounted". For this reason, it is necessary to rely on the truth that an event generates an influence on prices, whether intense or weak, and as such must be considered.

The Difficulties of Fundamental Analysis

The more malicious say that supporters of technical analysis "uber alles" despise fundamentals because, basically, they don't know how to use it. In truth, it wouldn't be a great fault, also because fundamental analysis is really difficult to master. In technical analysis, after all, it is necessary to learn to master the indicators and recognize the signals. In this case, one "reads" and that's it. In the case of fundamentals, one certainly reads but above all "interprets". Signals are not obtained automatically; a conclusion does not always correspond to a fact or a combination of facts. Since the world began, understanding the influences that one phenomenon exerts on another phenomenon is more difficult than doing arithmetic. Another difficulty is determined by the fact that, often, the postulate of rationality is frequently confessed. Exchanges abandon the reassuring field of logic and enter the much more complicated one of emotion. The typical example is given by rumors, which often make prices and which are fueled by feelings of fear, euphoria, etc. Finally, the enormous amount of potentially analyzable data must be considered. It's not just a few indicators but thousands and thousands of items that, at least potentially, can have an effect on prices. Partly to save time and partly for survival instinct, fundamental analysts lavish their resources on a limited (but still large) number of data points.

How Fundamental Analysis is Done

It is impossible to describe in an article what fundamental analysis consists of from a concrete point of view. After all, it can only be mastered after years of experience. However, it is possible to mention the main fields of application. Fundamental analysis often consists of studying the economic situation of the object immediately connected to the traded asset. In the case of a currency, the State that uses it. In the case - for example - of a stock, the financial and economic conditions of the issuer. In the first case, elements such as GDP growth, unemployment rate, etc. are studied. In the second case, attention should be paid to the balance sheet and in general to the company's financial statements. Let's be clear: the practice of fundamental analysis cannot be separated from a solid knowledge of the past. If it is true that history repeats itself, then it is necessary to know what has happened, in order to obtain immediate evidence about the present and the immediate future. This is the element of greatest criticality. Fundamental analysis means, first of all, theoretical study (certainly enriched by experience). The possibilities for beginners are almost exhausted in the study of market movers. These outline an interesting concept. Market movers are those events, usually of great magnitude, that certainly exert a measurable and demonstrable impact on the prices of a particular asset. Market movers can be studied with ease for at least two reasons. First, analysts often talk about them, so it is possible to obtain food for thought with relative ease. Second, the date on which they occur, and even their expected contents, are reported in so-called economic calendars. A market mover is, for example, a statement by the governor of a central bank, a conference in which data on inflation, unemployment, GDP, etc. are released. Market movers have a peculiarity. They refer to a particular asset but, whether due to an indirect influence or a chain reaction, they extend their influence to other assets as well. Consider the market mover par excellence: the statement on U.S. interest rates. Obviously, the event essentially concerns the dollar but also affects the value of other currencies, even national economies. An example? In 2011, the prolonged collapse of interest rates exported inflation to South American countries, causing a monetary crisis like few others in previous years. In a sense, the impact of market movers demonstrates the postulate of interconnectedness. After all, assets, markets, and even segments are connected to each other. It is a fact, and ignoring it can cost a lot.