Fundamental Analysis on the Forex Market
Changes in prices in world currencies, raw materials and metals are generally triggered by events in several countries and throughout the world. These events can take the form of economic or political changes and natural disasters. This is taken into account in fundamental analysis. Historical facts have also recorded a link between the change of leadership of a large company. Also changes in head of state and changes in production volume with fluctuations in currency pairs or other assets.
Basic Principles of Fundamental Analysis
A fundamentalist trader is more profit oriented by basing his predictions on the asset movement chart. Using fundamental analysis requires historical data in order to calculate volatility when important events occur. Or to be able to predict the direction of the trend when the central bank ruling is announced or when there is a difference in actual figures with consensus.
The following are the basic principles of fundamental analysis:
- Prices never change without a trigger.
- The influence of the factors that drive prices can be predicted.
- Precise calculations made regarding price dynamics due to economic / political factors can help determine the continuation of authentic price movements.
- Any rational event that cannot be anticipated can affect price fluctuations, but this is almost unpredictable.
Fundamental financial analysis can be used independently or simultaneously with technical analysis. So that poor predictions of continued price movements can lead to closing positions. Or to fixation on orders that traders previously assumed (at least) break even.
According to some opinions, announcing economic news for a certain period of time can disrupt the principle of technical analysis. So that every trade that relies on technical analysis should be postponed first.
Types of News Affecting the Market
When the news appears to be affecting the currency exchange rates, prices of oil, metals or other assets. We certainly need to study it independently in order to obtain more comprehensive information. The easiest way to solve this problem is to review the economic calendar. Besides that we also need to review other sources for the previous period and record changes in the actual price on the chart.
Analyzing fundamentally requires an actual source of information about the developing situation. Certainly the situation in countries whose national currency is to be used as a trading tool.
The level of influence of news on the market can be divided into:
- Less important (Low).
- Medium (Medium).
- Important (High).
In practice, news is varied by the level of volatility at the time of its release. In addition, it is also a systematic or random movement that has the potential to hinder the trade process. This diversity can determine the conditions for closing transactions. Which can be done earlier and with lower profits regardless of the performance of the Trailing Stop feature.
On the other hand, the potential for profits at high market volatility is very large. But to guarantee that profit needs to accurately predict the direction of price movements, and here is the role of fundamental analysis. Profit can be generated on any news background, the most important thing is right in choosing the order opening time. This approach will be very helpful in making large profits. Of course by entering the market to the top, not during the process.
Political Factors Affecting Price Changes
Not all political news can significantly affect the market. For example, the speech of a politician who had been predicted beforehand might not significantly shake prices. Sometimes traders are also faced with unexpected situations. Like “different decision announcements” and clarification comments that say “there is a misunderstanding”. This situation can lead to a decline or increase in asset prices. Including also reversing direction to the previous position impulsively.