Fundamental analysis is all about the psychology of the Forex market. It helps Forex traders and investors to predict market forces in the currency market. Fundamental analysis tends to be easier to conduct than technical analysis, as it is based more on logic. It is also easy to conduct this type of analysis, due to the high availability of news and other various types of fundamental information, on the internet. But it can be difficult to trade with fundamental analysis, despite the fact that this type of analysis is easy to conduct; fundamental analysis bears a number of weaknesses.
One weakness of fundamental analysis, acts as an advantage when conducting this type of analysis. Due to the easy access of fundamental information on the internet, Forex traders and investors can find news stories and such, with great speed. This means that the majority of news stories get discounted very quickly and before you know it, the FX market has already started to look to the future. This means that you have to act extremely fast to even stand a chance of benefiting and profiting from the majority of news stories. Many years ago this wouldn’t have been the case, with the absence of the internet and the online mass media outlets. Unfortunately though, Forex traders and investors now struggle to take advantage of most fundamental news releases.
It is important to note that the volatility of the Forex market has increased over the years. This increased market volatility weakens fundamental analysis and its effectiveness in Forex trading, as it means that individual news stories can no longer be traded with. Forex traders and investors now tend to have to look at a much larger picture.
You can of course still trade the news, but it’s not as nearly as easy as it once was – or as effective. It’s best that you focus on long-term fundamentals, which are responsible for driving the long-term trends in the currency market. Fundamental analysis can be used to keep track of long-term trends – you can then use technical analysis to time your market entry points. Fundamental analysis can also be used to spot contrary trades, that can sometimes be significantly large and very profitable.
Remember that fundamental analysis is more about taking into account market psychology. Because the FX market, like all other financial markets is highly dependent on market forces and mass psychology, you need to think about where the crowd is going and then you need to try and follow the crowd – but in order to make real profits, you will want to ideally be leading the crowd, because you’ll fail if you’re the last one to pick up on a trend.
In conclusion, fundamental analysis is a good type of analysis and can be effective, but its effectiveness has decreased over the years and it is now far harder to benefit from. You now need to be very careful, when conducting and using your fundamental analysis. When trading with this type of analysis, avoid trying to work short-term news stories. Try to focus on long-term fundamentals and aim to spot the best establishing trends. Also, try to look for contrary trades. Remember, fundamental analysis is only one of the two main types of analysis that you can conduct and use in Forex trading; use technical analysis too, in order to get the best out of both worlds as well as to maximize your success rates and profits.