Fundamental analysis is a preliminary step that should be taken before trading. It includes the examination of variation of exchange rates of forex currency pairs. Foreign exchange is the biggest trading market for a wide range of reasons, from currency exchange required for travelling abroad to cross-border transportation.
Traders put heavy emphasis on two key things before they step into Forex trading. These two key things are fundamental analysis and technical analysis. We will compare both fundamental and technical analysis later in this article.
What is fundamental analysis?
Fundamental analysis in forex trading is based on the intrinsic value of the underlying currency. Traders analyse the intrinsic value of the currency pair on several bases. It can be the supply and demand, economic performance of a nation, news, diplomatic relations of the country with neighbours and more. All these things come into play when we talk about the factors affecting the intrinsic value of a currency. But the primary fundamental that drives the fluctuation in currency prices is supply and demand.
One can quickly make an informed trading decision after conducting a thorough fundamental analysis. An informed trading decision will feed your investment portfolio in several important ways for earning higher returns by forex trading.
is forex legit the Forex market is a legitimate trading market where the world’s currencies are traded. It is not a scam in itself. Without the Forex market it would be difficult to trade the currencies needed to buy imports, sell exports, to go on holidays or do cross border business.
Why is fundamental analysis important?
The fundamental analysis serves the purpose of being aware of why the currency prices move. If you are able to understand the factors that affect the price movement of the underlying currency, you definitely came to know why it is essential for a trader to conduct a fundamental analysis.
Fundamental analysis in forex trading is quite different from other assets. In other asset classes like stocks, commodities, crypto and more, traders generally look at the past performance of the asset and analyse the pattern of price fluctuations, having a brief look at earnings reports and dividend payouts. But there is no sign of such things for fundamental analysis in foreign exchange. So, for example, a sales report will not influence the intrinsic value of the Euro.
Professional or seasoned traders always incorporate fundamental analysis in their trading strategies. Institutional traders also include fundamental analysis in their trading strategies to avoid randomness while trading. Well-strategised research of factors affecting supply and demand is a crucial part of fundamental analysis. Traders should seriously look at this kind of analysis to gain better returns and uplevel their trading careers.
Traders who conduct fundamental analysis are a few steps ahead of those who only rely on technical analysis. The reason for this is very clear because fundamental analysis helps to identify profitable trades quickly. A trader who goes with fundamental analysis would find herself/himself in a better position in future. Suppose you want to uplift your trading career by cutting a huge chunk of potential losses and maximising your investment returns. In that case, you should always consider fundamental analysis, especially when forex trading.
Fundamental vs Technical Analysis
Technical analysis includes reading charts and graphs and analysing the patterns and use of several technical indicators. But fundamental analysis consists of detailed research on the price movements of the currency pairs. So it involves a broad spectrum of things like economic indicators and national policies and all of those things that we have discussed earlier.
Whenever there is any impact on the stability of the nation’s economy, it directly reflects on that nation’s currency. And to research such a matter, you may have to follow fundamental analysis. It tells you the core reason for price movements. The exchange rate of a currency pair will also be affected by such things and research based on fundamental analysis to make an informed trading decision.
There are other significant factors like inflation that you cannot analyse by simply looking at the charts and graphs under technical analysis. Instead, you need combined economic indicators to examine the impact of inflation. There are two principal metrics: consumer price index (CPI) and producer price index (PPI). Using these two, you can monitor the inflation under fundamental analysis.
Technical analysis is mainly practised by scalpers who depend on small price movements to make a profit.
So if we conclude, technical analysis is just about how price moves but fundamental covers the whole concept of why price moves. So now you can understand why fundamental analysis is important in forex trading.
You can channelise your trading journey through whatever path you like to choose. Choosing fundamental analysis or technical depends on what kind of trader you are. If you are serious about holding your position for a long time and making a huge profit at a time, then fundamental analysis is the right path. But if you aim to create a massive profit by depending on a large number of small returns through scalping, then the technical analysis is right for you.