What is Forex Fundamental Analysis?

What is technical and fundamental analysis? What is the difference between Forex fundamental analysis and technical analysis? What are the methods of fundamental analysis and economic indicators? Where to watch economic news?

Good afternoon, gentlemen traders! Technical and fundamental forex analysis complement each other for perfect trading. While fundamental analysis gives impetus to the price, technical analysis determines the direction of trade. But what does technical and fundamental analysis provide? These two concepts are so extensive that it is not easy for beginning traders to understand this at the beginning of their journey. The best Forex analysis is not the one that includes only technical analysis or only fundamental market analysis. This is a combination of two types of analysis. Plus time interval in the trade. With the help of this article we will try to plunge into the world of both technical analysis and fundamental forex analysis. Today you will learn what a technical and fundamental analysis of Forex is, what are theories of technical analysis and methods of fundamental analysis, what economic indicators should be taken into account in trading, and what are the differences between technical and fundamental analysis.

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What is Forex Technical Analysis?

Technical analysis refers to the ability to read a graph and predict future prices based on historical data. This is how a bare graph looks like, where there is only price and nothing else.

You may think this is not informative, but the first traders did not have such luxury. Before the advent of computers, traders built price charts on paper, and technical indicators were mathematical formulas that calculated manually. The first theories of technical analysis appeared in the USA at the end of the 19th – beginning of the 20th century: Dow’s theory (late 1800s), Gann’s theory (1920s), Elliott’s theory (1940s), etc. During these years Such well-known technical analysis patterns such as head and shoulders, double and triple tops and bottoms, bull and bear flags, ascending and descending triangles and other graphical models were born. Charts have also evolved - from line charts, traders first went to bars and then to candlesticks , as a more informative display of prices.

After the appearance of the first computers, everything changed. A huge development of technical indicators began, which automatically calculated the mathematical formulas embedded in them and displayed the obtained values ​​on a graph. If before the first computers there were already moving averages, then after their appearance, indicators such as RSI, CCI, MACD and many others were developed. With the development of technical analysis, traders felt the need to divide the indicators into trend and oscillators. Therefore, the approach to the market has changed. However, the markets have also changed. Some no longer exist. Others appeared instead, for example, Forex trading. And then the methods of technical analysis began to change. Some models of technical analysis work well in the stock market, while others have performed well in the Forex market.

Now we take technological advances for granted. Moreover, with such a large number of technical analysis indicators, we tend to lose focus on what is most important - price forecasting. However, simple technical analysis methods such as support / resistance levels , trend lines , price channels and candlestick patterns have not lost their strength to this day.

Thus, Forex technical analysis allows you to increase trade discipline and bring your strategy to automatism. It helps to determine the best points to enter a trade, place a stop loss stop loss and take profit. Today, traders use classical theories of technical analysis, which are already more than a hundred years old, with modern methods of forecasting and achieve great success in trading.

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What is Forex Fundamental Analysis?

Fundamental analysis is an analysis of forces affecting the economy, such as interest rates of the Central Bank, GDP indicators, production capacity, consumer confidence, employment, etc. Fundamental analysis can help find a causal relationship in past price movements and predict future .

Economic news is essential for fundamental analytics, but it is important to understand that fundamental analysis is more than just tracking and understanding economic news. The fundamental analyst is trying to draw conclusions about the assessment of the exchange rate in the long term. These findings play a big role in making certain decisions.

Fundamental analysis is needed for almost all traders, although trading based on technical analysis is most preferable for most of them.

Why is economic news so important?

Economic indicators give all sorts of clues about the current economic situation of the country, and how this can affect domestic and foreign companies located in its territory.  

For example, if the Central Bank decided to lower the interest rate on the national currency, then it becomes cheaper to borrow money and invest. As a result, the money market is expanding, which, in turn, means that the price of a given currency will decline relative to other currencies.

A correct forecast of changes in interest rates and other economic indicators provides an opportunity for traders to successfully enter the market and make money on changes in exchange rates.

How to apply fundamental analysis in practice?

The important wisdom of the financial markets says: "Buy on the rumors, sell on the news." This means that rumors of a future event often raise the price, and that the event itself no longer plays a special role. On the contrary, the actual event often falls short of the expectations associated with it, with the result that the price instead of the expected growth may fall.

Consider this with an example. A week is expected to release news about the change in the interest rate of the Fed. Meanwhile, the chairman of the US Federal Reserve at a press conference mentions that this quarter all the indicators were fulfilled to raise the interest rate. After this phrase, the dollar rushes sharply upwards. And the news itself is unlikely to change anything. But if for some reason the interest rate will not be increased, then the dollar will fall.

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Economic Indicators of Fundamental Analysis

The following economic indicators are used in fundamental analysis:

  1. Interest rates. Increasing interest rates will make the money market more rigid. As a result, borrow money will be more expensive, and the value of the currency will grow. If the interest rate is reduced, the money market will become larger and the exchange rate will decrease;
  2. GDP change. In economic calendars, you can find these figures as GDP or Gross Domestic Product. They are usually announced one month after the end of the quarter. The greater the growth of GDP, the richer the country and its citizens;
  3. New jobs. The most important are the so-called non-farm payrolls of the United States. These data, published by the Bureau of Labor Statistics, show how many jobs have been created in recent months, with the exception of the agricultural and public sectors;
  4. Retail sales. For many countries, domestic consumption is important. For example, 70% of US GDP is determined by domestic spending;
  5. Consumer confidence. When citizens are not confident in the (economic) future, they also spend less. They save more in anticipation of a new crisis. Thus, low consumer confidence leads directly to lower costs;
  6. Production figures. When companies produce more, they need more people and they will more often invest in new technologies.

We have considered far from all economic indicators, since there are more than a hundred of them. However, not all of them deserve the close attention of traders and investors. The most significant of these are the interest rates of the FRS and the ECB, the change in GDP, the FOMC meetings on market operations, new jobs and unemployment, the trade balance and retail sales.

Where to watch economic news?

Economic news can be viewed in a special calendar of economic events. They are usually published by Forex brokers, but you can also watch the news on the website ForexFactory.com . Here is the news calendar:

Here we can see what news is planned for the current week for each currency, the release time and significance of the news, as well as the event values ​​for the previous period and the expected numbers. In the calendar settings, you can specify your time zone, the currencies you need and the importance of news. We are only interested in news marked with a red flag. Watch the news you need for the currencies that you trade. For example, if you trade the EURUSD currency pair, then you need all the important news related to the euro and the US dollar. And if you are trading GBPJPY, then you need to follow the news of the British pound and the Japanese yen, but do not forget about the dollar, since it is a world currency that exerts pressure on the economies of other countries.

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Even if you are more prone to technical analysis, you still better follow the economic news. Figures on employment, economic growth, interest rate decisions of central banks, press conferences of the Fed and ECB chairmen all have a direct impact on the exchange rate, regardless of what the technical indicators show. Therefore, there should never be a separation between technical and fundamental analysis. You must use both analyzes to succeed in trading.

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