Forex fundamental analysis plays an important role for forex traders because this is often the reason a currency changes rapidly. So that senior traders suggest studying fundamental analysis. Not only for beginners but all traders really need to learn forex fundamental analysis.
Broadly speaking, fundamental analysis is an analysis method that uses economic data to project the probability that an asset will rise in value.
Economic data depends on the assets being analyzed. In the stock. Fundamental analysis will look at the company’s financial statements and the performance of the companies that issue shares.
In forex analyzes the economic conditions of the country based on several kinds of existing economic indicators.
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Fundamental analysis explained
In forex, fundamental analysis is an analysis of currency movements based on economic data and the political conditions of a country. When there is a forex news release, the price will tend to fluctuate.
The reason is that important news releases can drive market risk sentiment, thus encouraging people to buy or sell currencies, stocks, or other financial instruments in a country.
In turn, these buying and selling actions can encourage an increase or decrease in the value of a currency, stock, or another financial instrument, as well as affect the flow of investment into a country.
In the long run, the value of a currency tends to reflect the economic conditions of the issuing country. If a country shows high economic growth, its currency exchange rate in the forex market will strengthen.
On the other hand, in countries experiencing an economic crisis, the value of their currencies can weaken and even experience high inflation, such as in Zimbabwe and Venezuela.
How fundamental analysis works
In the forex market, there are many kinds of market players, from governments, multinational and international companies, currency speculators, hedge funds, financial institutions, and many more.
Especially their hedge funds have very large amounts of money in making currency transactions. Because they aim for high profits for short time. Fundamental analysis, for them, is very vital and a determining factor for making trading decisions.
For example, hedge funds and large financial institutions see a country experiencing high inflation. Say the UK is experiencing an economic shock and it is causing high inflation.
High inflation is bad economic news, so the big speculators concluded that the British currency, in this case, the pound, will experience a decline in value.
So they bought another currency and sold the pound sterling. Due to the too great market power, even though the British central bank tried to intervene but failed to make the currency strengthen. Until finally their currency fell very sharply.
Bad economic conditions will also affect companies to place their factories in the country. So that the company will look for alternatives in other countries with more conducive economic conditions.
Why trader need fundamental analysis
Technical analysis is studied a lot, especially when traders are beginners because technical analysis is the first part that becomes the basis for learning forex trading. However, if you want to become a trader who has broad insight, it is very important to study fundamental analysis.
By learning how to do fundamental analysis, will help traders make decisions, especially for the long term strategy. Fundamental analysis is a compliment that can be very important when there is a high impact economic event, so it can decide whether to open a new position or leave the market.
If an analogy, the importance of indicator analysis is a buyer of an asset, so he must understand how the condition of the asset is, this goal is to minimize the risk caused by choosing the wrong asset to be purchased. In forex trading, studying the economic conditions of a country can reduce the risk when a trader will choose to long or short the currency.
Fundamental analysis that can be done is with a top-down approach, by looking at the macroeconomic conditions of a country. Then look at the industry from the average growth of the company, to see the condition of one company.
Macroeconomic factors are strongly influenced by government economic policies, such as interest rate policies. If interest rates are high, investors prefer to invest their money in banks, which will reduce the company’s business growth.
Conversely, if interest rates are low, investors will look for other assets that provide better gains, and companies will also be more active in doing business.
Government policies can affect economic growth. and this also determines the company’s performance, if the economy is sluggish, then the company’s performance will also deteriorate and may affect the value of the currency.
If the economy strengthens, the company’s performance can be maximized so that the macroeconomy will good growth and can push the value of the currency. The political stability factor also influences economic conditions in a country.
Industrial Sector Conditions
Industrial conditions in a country are a collection of economic actors as a whole is one barometer of a country’s economic average. The industrial sector that is growing rapidly can cumulatively affect the value of a country’s currency.
The growth of this industry is also influenced by global conditions. For example, when the world oil drastically increased it also affected the increase in the mining sector in 2007.
When oil prices fall, global conditions also experience an economic downturn and have an impact on the industrial sector which can also be the reason for a currency decline.
Fundamental analysis advantages
The advantage of fundamental analysis is that it can find out how the economic condition of a country is so that it can be used as a reference in forecasting the currency value in the long term.
By studying fundamental analysis will add insight into global conditions that are happening. Because global conditions greatly affect the overall economic conditions in many countries. So that investors or traders can look for safe alternative assets for investment.
If you learn from Warren Buffet who is a world investor, he will always do fundamental analysis when buying shares in a company. Long-term benefits of fundamental analysis can provide higher returns than in the short term.
To carry out fundamental analysis on a macroeconomic scale, a trader must be able to collect data on a country’s economic reports. Which can be a trigger for currency speculators to take action. Economic data written in the economic calendar schedule can be considered as early alerts before trading.
Important factors in fundamental analysis
The fundamental analysis emphasizes that the movement in the value of a country’s currency will be influenced by the condition of the country, in economic, social, and political terms.
By analyzing fundamental factors first, traders analyze market forces in terms of various factors that can affect supply and demand in forex trading.
Economic factors can be influenced by the economic fundamentals of a country and cannot be separated from the economic factors themselves. To measure the economy of a country, we can read it through economic data reports that are always issued by related agencies.
The strength and weakness of the economy will give policymakers action to issue economic policies that will affect the strengthening or weakening of the country’s currency.
The schedule for the release of this data report can be used by traders in determining a buy or sell a position in online trading transactions.
Social and Political Factors
In relation to changes in currency values, socio-politics can also affect a country’s economic fundamentals, although not always have a significant effect. The socio-political conditions that are currently in trouble can affect the currency compared to other countries.
Political conditions such as what happened in the United States, for example, also affected the value of the USD currency, this made the USD currency weakened after Trump lost the election to Joe Biden.
External factors can occur outside of economic and political conditions but are often related to natural events or disasters. For example, the MERS virus attack in South Korea in 2015 has cut the outlook of the Central Bank of Korea (BOC) on the country’s economic growth.
The earthquake in Japan caused the Yen to depreciate. The Covid19 disaster destroyed many stock prices and fluctuated gold prices.
Sometimes the central bank will take a policy to raise or lower interest rates. This is as a step to stabilize economic conditions. When the inflation rate increases, the central bank can make policies by raising interest rates to reduce the rate of consumption.
The hope is that the public will keep money in the bank with higher returns rather than for consumption. If there is little money supply in the public, the hope is that the currency will rise. Conversely, if the central bank lowers interest rates, the exchange rate can weaken.
Gross Domestic Product (GDP)
Gross Domestic Product is one of the economic indicators of a country that is also of concern to investors. GDP is economic data that functions to determine the total value of a country’s production produced by individuals and companies in the country and foreign countries.
Gross Domestic Product can be said as total state income. The main components of Gross Domestic Gross are consisting of the level of investment, consumption, government spending, and total net exports.
Consumer Price index (CPI)
CPI is an economic indicator that measures the cost of living and the average rate of change in the prices of consumers. For certain goods and services. The increase in CPI results in increased inflation which will encourage the government to lower bond rates and raise interest rates.
Non-Farm Payroll (NFP)
NFP is US economic data in the form of salary data for workers outside the agricultural sector. As a contributor to the Gross Domestic Product data. If the NFP increases, this can affect the strengthening of the currency.
NFP data is usually released every Friday at the beginning of the month.
This is also an economic indicator to measure the unemployment rate which shows job seekers who are still unemployed. If the unemployment rate increases. It is concluded that economic growth will slow down, as a result, the currency may decline. Conversely, if the unemployment rate decreases, then economic growth increases, and the currency strengthens.
Consumer Confidence Index
This is an economic indicator that shows the level of consumer confidence in the national economy as well as the level of financial health. If the level of consumer confidence increases, it is possible for the currency to strengthen.
Where to find fundamental news
In the application of fundamental analysis. Traders will look for data sources that are a reference in analyzing the macroeconomic conditions of a country and also see the economic calendar schedule.
There are many referral sites to choose from, the most popular of which is Bloomberg, however, to read articles from this site users must subscribe which requires a fee.
A reference site for viewing economic calendar schedules, for example, the forex factory, by reading every day the list of economic calendars that will be released at least as an initial signal when high impact news will be released.
In addition, you can browse information searches from other sources such as Dailyfx, Investing, FXstreet, Reuters, etc.
How to trade with fundamental news
The steps that can be taken for fundamental analysis are the following stages:
- Studying macroeconomic conditions.
- Studying global monetary conditions.
- Examining the difference in interest rates and balance of payments,
In fundamental analysis, investors or traders will read data. There are three types of terms that are common to new economic policy releases.
- Hawkish is a policy that tilts monetary tightening. Restrains the growth of Money Supply (M3), raises benchmark interest rates, sells securities. And cuts monetary stimulus (tapering).
- Dovish, which is a policy that tends to loose monetary policy. Encouraging the growth of Money Supply (M3), cutting interest rates, or even setting negative interest rates, purchasing securities (bonds). And launching a monetary stimulus (Quantitative Easing).
- Neutral, namely policies that tend to leave the policies that have been taken. Or in other words, do not make any changes.
The steps above may be a bit complicated for technical based traders. Because they require a lot of data and then deduce the value of the currency.
The simple fundamental trading move is to wait when there will be important news releases. By trying to seize the opportunity with a trapping strategy, buy stop, and sell stop just before the news releases.
Which better, fundamental analysis vs technical analysis
Both technical analysis and fundamental analysis are methods for getting profit trading. And both are indispensable for all traders and should be studied.
Advantage technical analysis
In relation to the advantages of technical analysis. Some of the advantages of technical analysis over fundamental analysis:
- Technical analysis is simpler because it doesn’t require a lot of data, it is directly facing the chart.
- Technical analysis allows for trading using timeframes in accordance with long-term and short-term trading plans.
- Recognizing price behavior through history from past prices.
- Allow adding indicators as analysis tools.
Disadvantages of technical analysis
- Unable to understand why prices move up or down.
- Often it doesn’t work well when there is high impact news.
- Price patterns are not always the same, so they meet with signal false.
Advantage fundamental analysis
- Get insight into world economic conditions as traders read news sources.
- Can draw conclusions about the factors that affect price changes.
- Often successful for long term trading.
The disadvantage of fundamental analysis
- Requires data sources from multiple sources.
- With so much data it can be confusing if one data is positive and another data is negative.
- Different market participants in responding to news can cause wars between buyers and sellers so that prices become random
From understanding the advantages and disadvantages of each method of analysis, traders can choose what makes trading comfortable. If you need to do a combination of the two. So be more careful in speculating on these trades of foreign currency.
Technical and fundamental analysts are a way of taking a market approach to predict possible future price changes. This is by studying how the currency market works, what factors make a currency go up or down. Learn price behavior in money charts that represent the supply and demand that occurs in financial markets.
This approach is a way for traders to do not to enter into the trap of gambling that relies on luck alone. That is what distinguishes traders from gamblers. Where traders will pay attention to the risk and future potential of an asset, while gamblers rely on luck alone.
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