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Forex Fundamental Analysis

Changes in the prices of world currencies, raw materials and metals are linked to a long list of events affecting the situation in a particular country and in the world. These can be economic, political or natural disasters. These events are studied when conducting the basic analysis. With an analytical view of history, it is possible to trace the correlation between switching heads of large enterprises, heads of state, and changes in the volume of production, with fluctuations in currency pairs and other assets.



What is the basic analysis based on?

What matters primarily to the trader is the possibility of making a profit by predicting the direction that the chart of a financial instrument will take during the beginning/end of a particular event. Part of the analysis includes a history study that allows for an assessment of volatility at the time news is published, the trend trend when declaring values above or below expectations.

The main principles on which market fundamental analysis is based:

  • Prices never change on their own - there is always a reason.
  • The impact of different factors on price movements can be expected.
  • Properly calculated calculations of the dynamics of economic/political factors allow for reliable judgment of future price changes.
  • Strong conditions affect price volatility, but difficult to predict.

Fundamental analysis of the Forex market can be used both independently as well as in conjunction with technical analysis. Negative analysis of price movements can lead to serious complications such as the early closing of open positions or doing such orders, which the trader previously relied on to bring him at least "zero", i.e. no loss. There is a view that the news is temporarily contrary to the principles of technical analysis, so when trading on the basis of technical analysis, it should be discontinued and returned only after the usual rhythm of volatility returns.

Types of news that affect the market

To quickly understand what fundamental analysis is, you can use the Economic Events Calendar on the Alpari website, where the most important events in the world are reported regularly. You should consider how they affect exchange rates, oil prices, minerals and other assets separately, because no one will reveal the 'secret'. One of the easy ways to solve the problem is to study the economic calendar and other sources of previous periods and to observe the actual price changes on the chart. Basic analysis requires having information about the real situation in countries where a trader plans to make money by trading in their national currency.

According to the degree of influence in the market, the news is divided into the following categories:

Weak importance.

Medium importance.

High importance.

In practice, news is characterized by the value of volatility at the time of publication, and they have a planned, chaotic or impulsive movement that hinders trading. For this reason, trades may be closed prematurely and with a minimum profit, despite the activity of the "Trailing Stop" feature feature.

On the other hand, the potential profit at the time of the news is very tempting. But to make a guaranteed profit, you need to know the direction of the price movement. Here is indispensable analysis. Profit can be earned from any news, the main thing is to choose the right moment when opening a position. This approach will help you maximize profits, enter the market at the top, not in the middle of the process, as often happens when trading on the news.

Political factors affecting price changes

The value of a country's national currency is influenced by foreign and domestic policy news. Therefore, instability weakens and lowers the currency. During presidential and parliamentary elections, there may be fluctuations caused by rumors, often unconfirmed. In the opinion of experts, such cases are deliberately provoked, in order to use a temporary drop or increase in prices to extract profit.

Some political news does not significantly affect the market. For example, a position of a politician is already known, so at the time of the official publication of his speech, there will be no special price fluctuations. Sometimes traders face unexpected factors for them, for example, "declaration of another opinion", and the subsequent explanation that "everyone misunderstands them." Such a situation usually leads to a downward trend in asset prices as well as a rapid return to where they were.

The role of political news in trading is relatively small. Fundamental Forex analysis usually sees it as an additional factor that has a greater impact on the long-term perspective, while short-term trading is conducted on economic indicators.

Economic factors

The value of the national currency in comparison with that of other countries depends on the economic situation in the country. When working with leading currency pairs, the comparison is usually made against the US dollar, while in cross pairs, with other currencies, the US d.U. does not remain in the calculations. This relationship leads to the fact that the currency pair interacts, on the one hand, with any American news, and on the other hand with events in the country where the currency is spreading .

The main indicators of each country are:

  • Employment data. They are the level of unemployment, the amount of unemployment benefit, and the positive/negative dynamics of the changes in these indicators. Employment in the industrial/agricultural sector is considered separately.
  • Trade balance, which shows the size of its production, import and export volumes (total indicator of all types of products).
  • Gross domestic product (GDP) - the total amount of goods produced in the country, services provided.
  • Changes in the policy of central banks in individual countries, and the European Union.

The specificity of the Forex market lies in the fact that fundamental analysis must be carried out simultaneously in many countries. The United States often acts as a key link in predicting and maintaining more price movements and trends. A country whose currency is included in the rolling pair can provide a complementary or offset effect on price fluctuations.

The impact of force manure on prices

All natural disasters (earthquakes, hurricanes, storms, droughts, floods) affect the market in an unexpected way. Partial help to predict its impact comes from meteorological news, but working on such calculations remains a major risk. The same applies to technological disasters: they are unpredictable in any way, and the trader will see the impact on the market "after reality"."

It is easier to work with factors of a social nature, including coups, military conflicts, revolutions, and strikes. Any general disturbance could lead to a devaluation of the national currency. Depending on the traded pair, the stores can observe an increase or decrease in the price. Predicting these changes can be provided that the period of force events is long-lasting.

Rules for using the economic calendar

One of the main tools of a Forex trader, who practices fundamental analysis, is the economic calendar. It covers major events in the world in the context of individual countries (even those that have little impact on the market). In the published list are referred to historical and expected indicators. For a trader, it has no value unless it has per-set forecasts: will the forecast be confirmed? Or will the actual performance be better or worse? The economic table refers to the events for which we must pay special attention, and to the type of data that must be analyses in the first place.

When trading on an economic calendar basis, the key points are:

  • The higher the importance of the news, the higher the pair's volatility rate. In this case, it is difficult to trade market orders due to high pressure on the broker's server, so it is recommended to enter the market in advance with the help of pending orders.
  • When taking a long-term approach to trading, one should pay attention to publications from central banks. Through analysis of declared policies, the post-financial development of a particular country, an alliance of countries or the world as a whole, can be predicted.
  • As a result of sound policy analysis, it is possible to develop expectations for the post-financial development of one country, an alliance of countries, in the world as a whole.
  • Great attention should be paid to expectations. If the data just released is better than expected, currency value growth will be more likely. If data maintains its values, even "strong" news will not have a strong impact.

Basic analysis can be shortened by working with the economic calendar.

All events are displayed in the economic calendar. When a trader chooses one or a limited number of currency pairs, it is recommended to create a filter to hide the countries "unnecessary". Therefore, when trading the USDJPY pair, you can not focus on European news. Price fluctuations are affected by events in the United States of America and Asia.  

The impact of fundamental analysis on the technique

Violent discussions about what to choose: basic analysis or technical analysis usually turn into a decision to merge both options. Controlling support and resistance levels allows you to predict the likelihood of a change of direction if the price breaks through a strong level when the news is published. The basic and technical methods of analysis can jointly enhance the effectiveness of their use.

The impact of fundamental foreign exchange market analysis on technology is reflected in the following:

  • News impulses often break down previously created patterns, dramatically changing current trends. Traders who practice technical analysis, at these times usually only monitor changes in the market.
  • A large number of trading strategies are based on the correction produced after the news pulse. At these moments the rules of technical analysis are resumed.
  • The underlying factors take precedence over technical factors. If all the news is about the potential growth of a particular asset value, the graph may be incorrect (in the long run). 

Working on H4 time periods and higher necessarily must include elements of fundamental analysis. Without taking into account political and economic events, it is difficult to determine the tasks of taking profits in large quantities. If you look at the date, you will notice that there are repeated returns to the starting point in short periods - several days, weeks.

Trading strategies on the news

Trading in the Forex market, taking into account economic/political news, is available in manual mode and with the help of automatic advisors. The latter, depending on the type of trading strategy, is set either to stop trading "near the news", or on the contrary, to activate it. Preparations to open orders may include technical analysis, but at the trader's request, it may be rejected in favor of economic forecasts.

Trading on the news has a number of features:

  • Opening high-probability market positions is usually possible on just one pair. Navigating between charts and entering the market in a timely manner in several pairs can only be assisted by consultants or scripted software.
  • Pending commands are widely used. However, it is necessary to take into account the specificity of the opening with the "first available price". Where the stronger the news, the more likely it is to slip, which is normal.

Traders who prefer to trade on the basis of fundamental Forex analysis should follow experienced analysts. Thanks to such independent, unbiased analyses, it is easier to understand what is going on in the market and current trends. Therefore for lack of time, or even the desire to understand everything ourselves. Such an approach can provide high efficiency: "personal signals") are verified with information from competent experts.