Forex analysis…. Yes/No
Fundamental analysis in the field of FOREX trading refers to studying and analyzing the vital factors which are responsible for economic and financial health of the entity. Such analysis is generally undertaken with an intention to estimate the price movements and derive financial advantage from such change in price trends.
Why does the fundamental analysis matter?
It analyses various fundamental economic as well as other external factors like socio –political environment, industry analysis etc, for predicting the price trends. In rapidly pacing global economy, it is very important that the traders won’t be misguided by the market prices or market valuation of any currency or stock price. This is because the stock price or currency rate may very well be undervalued or overvalued due to various fundamental factors as stated above. This is why it is important to carry out fundamental analysis for arriving at fair value of the underlying asset, be it currency or stock price. This will ultimately enable the investor or trader to pay for what the underlying asset is worth for rather than for what it is priced in the market.
Role of trader in fundamental analysis
The Forex trader may be either technician or fundamentalist or may also have a blended approach. Technical analysis focuses on price charts for predicting the future price trends whereas the fundamental analysis basically relies on fundamental financial factors like financial statements to derive the intrinsic or fair value.
Basic difference between these two thoughts of schools will be those fundamental analysts compare the market prices with the intrinsic or fair value so arrived by analyzing the financial factors. However technical analyst will consider the price charts to be ultimate valuation or measurement tool for predicting future trends.
Relationship between fundamental analysis model and Forex trading strategy
Though fundamental analysis is helpful in predicting the economic conditions, it is difficult to spell out the actual market prices. It gives the necessary basis for decision making and strategy making, which will actually dictate the entry and exit strategy from the market. One has to translate or apply or convert the fundamental analysis results into specific trading strategy.
Information overload or Analysis Paralysis
One of the major drawbacks of the fundamental analysis is that Forex trader tends to get overwhelmed due to wide array of fundamental factors. Such huge pile of information may often lead the trader to be paralyzed by analyzing to such an extent, that at such point he may go for technical analysis. Even though the technical analysis may not be considered accurate, the Forex trader may switch to technical analysis to test their intuition.
Importance and relevance of Fundamental Analysis
Fundamental analysis combines variety of fundamental factors which influence the economic and financial conditions of an entity or country. This is why the fundamental analysis focuses on core financial and economic data as well as other social, political, environmental etc factors for predicting the economic and financial position. For e.g. If a trader carries out fundamental analysis of an entity by studying its financial statements rather than just looking at its price charts (technical analysis), he can gain much knowledge about the entity as a whole. This will in turn enable him to gain total control over devising his own trading policy, which will define entry and exit points based on the core fundamental analysis.