Fundamental analysis of the Forex market
Price changes in global currencies, commodities, and metals are connected to a plethora of developments that have an influence on the situation in a particular country and on the world as a whole. These can be economic or political changes as well as natural disasters. This is exactly what people look at when they carry out fundamental analysis. If we look at history, it’s possible to correlate changes in management at major enterprises, in heads of state, or of production output, with fluctuations in currency pairs or other assets. The question is, how to do fundamental analysis forex? The economic calendar indicates the most important events, that is, the data that we must analyse first.
When trading based on the economic calendar, the key points are:
The more important the news, the greater volatility one can expect from the currency pair. In this case, placing orders with market execution is more difficult because of a high load on the broker's server. As such, it is recommended to enter the market early, with the help of pending orders.
In long-term trading, central bank publications are important. By analysing their monetary policies, you can make a prediction of the financial situation in a specific country, a set of countries, and even the world as a whole.
You have to pay attention to the forecasts. If the recently published data outperformed your expectations, the currency's value is likely to increase. If there are no significant changes in the data, even if the news is strong, there will be no significant price jumps.
The economic calendar shows all events. If a trader usually deals with a specific currency pair or a group of currencies, it is recommended that you create a filter to view only the countries that relate to these currencies. For example, when trading the USDJPY pair, you can hide the news from European countries, as the events influencing the pair are in the US and Asia.
The influence of fundamental analysis on technical analysis
Discussions about the best type of analysis; fundamental or technical, usually lead to the conclusion that it is best to employ both. Monitoring support and resistance levels helps predict trend changes when the price breaks an important level during certain news releases. Combining fundamental and technical analysis (FA and TA, respectively) leads to a more effective outcome.
The fundamental analysis of the currency market influences technical analysis as follows:
The impact of news often disrupts previously formed patterns, abruptly changing market trends. In times like these, TA traders prefer to just watch the market swings.
A lot of trading strategies are based on correctional phases, which are very common after strong news. The principles of TA begin to apply again during these correctional phases.
Fundamental factors take precedence over technical ones. If the news points to a likely rise in the price of a certain asset, the technical picture may prove to be incorrect (in the long run).
Operations performed at intervals of H4 or more should definitely include fundamental analysis. It is very difficult to get high profits without taking political and economic factors into account. Looking at the price history of any asset, you can see many cases of the price returning to its point of origin within a short time (in a matter of days or even weeks).
Trading strategies based on news
Trading on the Forex market based on economic news and policies is done both manually and automatically (via "consulting" robots). The latter, depending on the type of trading strategy, is configured to close or open positions ahead of news releases. Preparation for the opening of the orders may include technical analysis, but the trader can opt to reject this in favour of economic forecasts.
Distinguishing features of news-based trading:
The manual opening of market orders with a high chance of profit is usually available only on one currency pair. Changing between graphs and successfully entering the market from anywhere can be achieved only with the help of advisors/scripts.
The use of pending orders is very common. But you have to take into account that when opening at the best available price, the stronger the news, the greater the likelihood of slips, which is a normal occurrence.
It's recommended for traders who practice fundamental analysis to subscribe to newsletters published by experienced Forex analysts. By studying independent forecasts it will eventually become easier to navigate the current trends. After all, you don't always have the time and desire to figure everything out on your own. This type of approach is more efficient, since market signals are analysed based on the knowledge of competent experts.Source: "What is fundamental analysis?"
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