Although fundamental analysis is very popular, it can still fail if it is carried out poorly, improperly and ineffectively. It can be very powerful and profitable, if it is conducted well, though.
Although many Forex traders think that fundamental analysis is just about trading the news, it is not. You do of course trade with news releases when trying to take advantage of this type of analysis, but you don’t just ignore all the other factors that come into play too. You have to make your own judgement on the news releases that you watch and the various other information (related to the fundamental indicators) that you discover; you need to assess how the rest of the market will take both the news releases that you watch and the other various information that you discover, because they might not collectively take in the same information exactly as you will. This is similar to stock trading, where you don’t simply predict the future of a stock’s value by assessing how well the company will do in the future; a stock’s future value is determined by market forces which are caused by mass psychology.
Fundamental analysis is all about predicting what the rest of the currency market’s traders and investors will react to news releases and such. Again, the FX market is just like the stock market in this sense; even if a company does exceedingly well, its stock value won’t necessarily increase – its value depends more on the amount of hope that the stock market has for the company. The markets are about mass psychology and even if a news release might suggest that a country’s currency will increase in the future, you still need to consider the rest of the market and predict what you think the rest of the market will make out of the news release in question.
If you want to try and take advantage of fundamental analysis, by trading fundamentals effectively, you need to be able to take into account the mass psychology of the market for currencies – it’s simply, really.
Another way in which your fundamental analysis can fail, is by not conducting (and neglecting) technical analysis. It is only one type of analysis that Forex traders and investors should take advantage of; the other one is of course the technical type of analysis. Price charts and graphs will be able to give you a true picture of what the market is doing and the two types of analysis compliment each other very well. Don’t trade Forex half-blind – take advantage of both types of analysis. It’s not hard at all, as most online Forex brokers will be able to provide you with all the resources you need to conduct the two types of analysis. Though do try to diversify your resources and sources of information, for optimum results – it’s best to try and get the same information from the same sources that the majority of the market does, as this will allow you think more like the rest of the market.
It is important to understand the flaws of fundamental analysis and how it can fail. This is because, unless you are not using any leverage or are participating in binary options trading, you could suffer quite badly (particularly if you do not have a good Forex trading plan in place). It might be worth staying away from leverage if you want to limit your risk and also have good stops in place. With a good Forex trading plan, you will be fine, though you still do need to understand fundamental analysis and know how it can fail, especially if you are using a solely fundamental trading strategy. Binary options trading might be worth trying if you really want to keep in control of your risks and rewards.
In conclusion, fundamental analysis in Forex trading is all about mass psychology and the psychology of the overall FX market. When conducting this type of analysis, you need to try and consider the minds of all the other Forex traders and investors in the market for currencies, as all of their minds collectively are worth more than just yours alone. Currency trading is about following the crowd really, but you don’t just want to follow the crowd; you ideally want to be at the front of the crowd leading it, meaning you don’t want to get into a particular trend or pattern late or you could miss out. Fundamental analysis can be very profitable, but you must carry it out properly and effectively, while also conducting an adequate amount of technical analysis. You might even focus more on that type of analysis, but whether or not you do choose to will ultimately depend on your Forex trading strategy. You will most likely carry out more fundamental analysis than technical, if you have a longer-term currency trading strategy.