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Forecasting Forex with Fundamental Analysis an Introduction

By : Monica Hendrix
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If you are forecasting forex with fundamental analysis you are effectively looking at the supply and demand situation and trying to judge which way prices go. Forex prices respond to the long term fundamentals but you need to avoid the errors most traders make to succeed.

What is Forex Fundamental analysis?

Studies all the facts in relation to the supply and demand situation of the currency and these are numerous and include:

Political factors

Interest rate outlook

Economic health of the economy

Government economic policy

And more make up the supply and demand picture

These are the facts and all traders see them but they draw different conclusions from what they see - this is the problem for any Forex trader and a problem for the trader following fundamentals.

A simple equation for market movement is:

Economic Fundamentals + Human perception = market movement

It is a fact that the markets do reflect the forex fundamentals but traders are emotional so they will push prices to far either up or down.

It's a fact that markets tend to collapse when the fundamentals are most bullish and rally when they are most bearish. So you really need to follow investor psychology as well if you want to succeed.

News Is Discounted Instantly

Today we live in a world where the supply and demand fundamentals are available to all at the click of a mouse and they immediately show up in price action, so if you try and trade a news story, its been discounted and your playing catch up.

The news also relfects the greed and fear of the participants and can be misleading. Will Rodgers once said:

" I only believe what I read in the papers"

He was joking but the maount of people who take what the news says witout questioning its logic is huge.

For most traders trying to trade the fundamentals is impossible, as prices move too quickly and investor psychology constantly wrong foots them, as prices move opposite to the fundamentals, because investor psychology is emotionally driven.

Save Time and See the Whole Picture

The easiest way to trade is via technical analysis and forex charts.

You have the forex fundamentals covered as forex technical analysis simply assumes they show up in price action straightway and in today's world of lightening fast communications, this is truer than ever before.

Furthermore, you get to see graphically how investors perceive them - this is very important and gives the overall picture.

A trader using forex charts does not try and work out where prices may go, he sees where they are and acts on the reality as he sees it.

This method is less time consuming, keeps your emotions out of trading and lets you trade on the reality of price.

A Surprising Forex Fact

Forex fundamental analysis is hard for most traders and although news is faster, better and more numerous than ever before a simple fact will illustrate why it won't help you:

The ratio of winning traders is still 5% and it was at this level 50 years ago - despite all the advances in fundamental forecasting.

A Better Way to Win

It won't make you a better trader or help you make money it will simply consume your time and see you lose. Trade via forex charts and you will see the whole picture and be able to spot profitable trading opportunities and act upon them and enjoy currency trading success.

Forex fundamental analysis is hard and technical analysis for most traders is the better option.



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