There is some debate about whether fundamental analysis is more effective in the short run or long run. Generally, this type of analysis is thought to be more effective in the long-term, but this doesn’t necessarily mean that it can’t allow Forex traders to also spot short-term opportunities and make faster profits in the market for currencies.
Fundamental analysis is all about studying the news; this means that fundamental traders will look at both key economic data as well as political news, broadcasts and announcements. Most news releases can affect the prices of currency pairs in the Forex market.
Many fundamental traders focus on long-term profits, by predicting how a particular economy will turn out, relative to another economy. For example, if a Forex trader thought that the US economy would improve dramatically over one year and in the same year they thought that the UK economy would do badly, they would consider buying the USD/GBP currency pair. This is because they feel that the US dollar will go up in value and the British pound will go down in value. If a fundamental Forex trader wanted to make more short-term profits though, they might predict that the next, upcoming US nonfarm payroll (AKA the job report) would bring out record highs, so they might then consider buying the US dollar before its release and then sell shortly after its release, when the demand for USD increases.
The main reason why most fundamental Forex traders focus on long-term profits, is that news trading strategies are thought to be safer when used in the long run, rather than in the short run. The markets can react to news releases with great volatility and this can cause brokers to be slow at filling the orders of Forex traders – this can cause many traders and investors to lose out and even deduce losses.
Also, you can make a lot more money by conducting fundamental analysis in the long-term, rather than in the short-term. If you can predict the futures of different economies well, you could make a lot of money by trading the news in the long-term. However, it is definitely more difficult to do this successfully – it is easier to trade short-term news releases but it is much harder to have your order safely placed in time. Some Forex brokers will fill your orders almost immediately even in times of great volatility, but you still might jump on the band wagon too late and lose out or you may even get it wrong anyway, which could cause you to deduce a fair amount of losses if you don’t incorporate good money management techniques.
Really though, fundamental analysis can be effective in the both short run and long run. Some currency traders might find it easier to trade news releases short-term and others might find it less difficult to trade news releases long-term. Although many say that fundamental Forex traders should only look for profits in the long run, many continue to make a lot of quick and easy money through conducting short-term fundamental analysis.
If you are a beginner though, you may want to consider conducting long-term fundamental analysis only, since short-term news trading requires a fair amount of experience since it is much more risky.
In conclusion, fundamental analysis can be used in the both short run and long run. It is perhaps more likely to be effective in the long run, but it can be just as effective in the short-term if conducted and used properly.