Home Commodities and CurrencyForex Fundamental Analysis and Forex: A Very Effective Combination

Fundamental Analysis and Forex: A Very Effective Combination

By: KeithTimimi Date: 23 December 2009

About The Author

The free-spirited family-man internet entrepreneur who fell in love with the study of economics. And

Fundamental analysis is the method used by some of the most successful traders in history. Jim Rogers, George Soros, Warren Buffet are some of the many names that come to mind when we desire to recall a few of the great traders who owe their success to their proficiency in fundamental studies. George Soros is especially famous for his exploits in forex trading which were always justified on fundamental grounds. Sadly, fundamental analysis is not that popular among traders partly because of a failure to comprehend what it is, and partly because of misunderstandings about how it should be applied. We’ll take a look at this important topic in this article.

Fundamental analysis aims to make sense of market events in light of economic realities that drive human behavior. A trader can have all kinds of psychological reasons for why he is buying or selling a particular currency, or a stock, and many of them may not even make sense, but as long as he can obtain the funds to buy and sell, his opinion will count. Fundamental analysis can help us get to the root of this funding problem by characterizing the dynamism of an economy, the stages of the economic cycle, the social, and economic factors that influence people’s decisions, and government policies, and finally condensing them all into a meaningful model which can be used evaluate and predict market events. Unlike technical analysis, fundamental methods are not dependent on prices very much. Instead, from the point of view of the fundamental analyst, it may be reasonable to exclude the price action entirely from the analytical picture at times in order to get a purer evaluation of the economy.

That is not to say, of course, that fundamental studies are unaffected by market psychology, and irrationality. Fundamental studies do aim to tackle these subjects, but do so in the framework established by causality. A technical analyst does not know why something happens when it does happen, and indeed, we cannot say that he’s very much concerned about causes. A fundamental analyst, on the other hand, always wants to get at the root of problems and reach at the causes that create trends in the market.

Fundamental analysis is the study of the causes of market events. Anything that can have an impact on prices will be considered by the analyst, but only as long as the weighting that each factor justifies the time and energy spent during analysis. These weightings change all the time. Politics, for example, does not have a dominant impact on stock prices during ordinary days of trading, but when there’s government crisis, a war, or a scandal, it can become the dominant force behind market events. In addition, fundamental events take time to manifest their full effect. Trading the news, for example, can hardly be considered a fundamental strategy. In short, the fundamental school is effective, and reliable, but only if it is applied after a reasonable period of education, with a powerful commitment to analysis, and risk management.