Fundamental Forex Analysis
Trading forex online could be made much more efficient and easier if some fundamental knowledge and analytical ability were to be employed in compounding the technical strategies favored by the trader. Technical tools have the advantage of precision that is often deficient in the context of a purely fundamental approach. But technical methods themselves lack the clear causality relations implied and examined by a fundamental study of economic facts. Yet traders are somewhat wary of the fundamental method due to its perceived complexity, and perhaps more because of the lack of a reliable framework in which they can construct their own approach. In this article we’ll provide a very basic checklist to serve as such a framework, although the trader is encouraged to focus on developing his own approach through frequent practice.
Start with the Macroeconomic Era
Since the world of economics is integrated strongly on a global scale these days, we discover that economic events at the smallest scale are connected to the strongest and long-lasting trends at the international level. In the past, natural phenomena would work to harmonize economic developments, but today the actions of human beings are transmitted so rapidly across borders that they create their own macro-trends over time.
Fundamental analysis should begin at the global stage, and focus on political, and social factors, as well as major economic trends. Political analysis will examine wars, political tensions, potential conflicts, and trends in economic legislation on a worldwide scale. Economic analysis needs to focus on technological developments, the overall trends in major economic regions of the world (such as Asia, Europe, or the Americas), and the phase of the global business cycle. There are many other factors that will receive emphasis depending on the timeframe, but that much is beyond the scope of our article.
Consider Monetary Environment
Modern economies are based on lending, so the monetary policies of major nations play a crucial role determining the potential for growth in their respective economic regions and beyond. Restrictive policies imply market tensions, but also political problems, which must be observed carefully. Lax monetary policies, may and do often lead to bubbles some of which end with catastrophic results.
Zoom in to your currency pair
Once you conclude the analysis at a larger scale, it is time to narrow down the focus of our study to concentrate on the specifics of the currency pair studied. Contrary to general opinion, this stage is of only limited value in establishing trends (we can hypothesize that it should not posses more than a 30% weighting in the formula establishing the direction the currency pair). It is still important for micromanagement of positions, and even more importantly for the analysis of risk: although currencies may behave similarly at times of calm, their behavior will differ widely in times of volatility. To perform this last stage of analysis, we need to look at interest rate differentials, above all, but also at the current account trends in the currency pair.
The
best forex broker will give you only a limited amount of the tools necessary for performing this type of analysis. It’s your task to seek the analytical resources online and to construct your method. But the method works, and it probably can double your chances of success if employed with patience and rigor. Don’t hesitate to test it, since the results may be a surprise to you if you’re not familiar with fundamental studies.
