By Warren Seah
There are basically two forms of analysis that traders divide themselves between: the fundamental and the technical. Though both forms of analysis are great in their own ways, they have their problem with them. In this article, i’ll be focusing on the problem with forex fundamental analysis.
Fundamental analysis mainly focuses on the overall state of the economy, interest rates, monetary policies which are basically the economic conditions of a country. It is always great to know how the markets move and the economics of the world as it greatly affects financial markets but solely depending on fundamental analysis to trading the market such as forex will be disastrous. By the time you receive economic news, there are other people beforehand who knew this piece of news acted on it and the result will have been reflected on the charts.
Economic news are generally skewed by the fact that they do not always factor in some main data as sometimes some countries wanted to show that they are doing well in good times and alright during bad times which is linked to political factors. They are not to be trusted 100% and can only serves as a guide complement with your technical analysis.
Normally when news is released, everyone will have the same idea of the markets thus creating a herd mentality. Since everyone is talking about buying, the tendency will be might as well join in for a ride to make a killing. But those who knew what was going on chose to stick to what they always believe in and that is what the chart is telling them.
A well informed trader will use long term fundamentals together with trends spotted with technical to establish a trade bias. Short term news such as non-farm payrolls (NFP) often may develop knee jerk reactions in the market, creating false signals that mislead traders that there is a change in the market sentiment. It is only after when the dust settles that one can see the trend which the market is heading.
Having only forex fundamental analysis do not provide a whole picture to your trading decision, it is always advisable to combine with technical analysis to aid in your decision making. If you are unsure about how news can affect your trades, always look to avoid trading during high profile news release and wait till a few days while still observing the movement of the markets before you decide it is comfortable to trade again.
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