What is fundamental analysis?

Fundamental analysis in forex is a type of market analysis which involves studying the economic situation of countries to trade currencies more effectively. It is the analysis of economic fundamentals of a currency's host country or economy. Economic fundamentals consist of a large collection of data and information in the form of economic, political or environmental reports, data, announcements or events.

Traditionally, fundamental analysis has been the cornerstone of investing in company stocks and business. However, it has different role to play in forex where the primary focus is on "Trading" and not so much on "Investing". The vast majority of holding periods are short-term, ranging from trades that last a few seconds to those that stay the day. While day traders use fundamental analysis to check sudden market swings, medium-term and long-term (position) traders use fundamental analysis as a currency valuation tool.

Hence fundamental analysis is a valuable tool in estimating future economic conditions, but not so much for predicting immediate currency price direction.

Reading and interpreting economic reports

One of the challenges in fundamental analysis is the sheer volume of data you will have to deal with. In addition, the economic releases are for a single currency. To analyze a currency pair you will have to follow necessary releases from both countries.

You can use an Economic Calendar to get a comprehensive view of all the fundamental release. Learn how to read an economic calendar by following the link below.

How to read a Economic Calendar?

Economic Calendar

Those who focus purely on technical strategies could lose a ton of money when an important fundamental event goes against their technical assessment. Similarly, a pure fundamental focus could result in you missing a rally and quick short term upside.

Hence Successful Trading requires that you take the best of fundamental and technical analysis. This covers all aspects and parameters that can impact the direction of a currency pair.

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