Fundamental analysis looks at the underlying reasons why a market may have moved in a particular direction, instead of analyzing trading patterns as with technical analysis. If you prefer to perform fundamental analysis, this means that you will be following the latest forex news and major global events, in order to better determine which direction a particular currency will travel in and more accurately execute a trade.
What is Fundamental Analysis?
Fundamental analysts assert that supply and demand determines the price of a currency. For example, if a currency's economy is healthy, that currency is more likely to increase in value. If it is unhealthy, that value will decrease. As a result, major global, economic and social events can significantly affect market activity, thus influencing one's trading decisions during online forex trading.
Some of the main financial factors known to influence market activity include inflation, interest rates, economic health and market sentiment, though there are plenty of others that also play a huge role in affecting market prices. Reports such as Gross Domestic Product (GDP), industrial production and retail sales also play a big role in influencing the market. Whether you wish to trade forex, CFDs or precious metals, these reports are extremely important in foreseeing future market movements.
Why Fundamental Analysis?
Most forex brokers provide live forex news for conducting fundamental analysis. This information is usually streamed to your chosen platform, though it is also featured on the homepage of many forex brokers' websites.
While technical analysis is a learned skill that requires the ability to analyze complex graphs and charts, fundamental analysis involves assessing everything that makes a country tick, from interest rates to central bank policy. Some traders find this method more straightforward to adopt as the information is readily accessible from numerous sources. However, it is also easy for the fundamentalist to become overloaded with information, since there is so much of it available throughout a given day.
Are Fundamental and Technical Analysis Entirely Different?
Though fundamental and technical analysts tend to be categorized as two separate types of traders, it is not unusual for either party to adopt the other's resources during forex trading. For example, a technical analyst cannot trade forex or CFDs without keeping an eye on the various signals presented on charts. At the same time, fundamental analysts cannot completely ignore significant political decisions, economic statistics or other social factors that have a resounding influence on price movements when performing online forex trading.
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