Points to consider while performing fundamental analysis

There are two different approaches to analysis in online forex trading. Technical analysis regards the price as the only credible basis of any strategy, while fundamental analysis bases all its predictions on the various factors influencing the price action itself. One of the more striking differences between fundamental and technical schools is in their age. While technical studies are new, fundamental analysis has been with us at least since the invention of coinage. Ancient speculators who based their trading decisions on news about warfare, or famine were practicing fundamental analysis, with the difference between today’s analysts lying in the lesser accuracy of their resources. 

In the past, when financial news resources were not that numerous, and sources of analysis and commentary were similarly limited, news trading and trading on the basis of fundamental analysis were nearly identical. The speculator would receive news about shortage or excess of a commodity at a location, and would head there to exploit the situation financially. In today’s informational environment, however, where noise is much more abundant than news (even if we exclude the possibility of false information being spread), we need to make a distinction between news trading, and fundamental analysis. Before the development of the internet and mass media, sorting out the correct information from rumors was a serious problem, but today just sorting out the important or significant pieces of information from those that are routine or insignificant can be a major issue. 

To sort the available information on the basis of relevancy and usefulness, we must first acquire an understanding of the so-called big picture itself. Thus, to perform fundamental analysis successfully, we must weigh every piece of new data only on the basis of the place where it fits in the big picture which we construct mentally. If our scenario for an economic resurgence, for example, is dependent on increased capital spending, and laxer bank lending, our economic vision will not be that much impacted by the state of business inventories, or GDP releases for example. Similarly, if we expect the economy to contract in the future as a result of the impact of international geopolitical turmoil, we will not be that agitated by healthy unemployment statistics.  

The point of this article is that, in the absence of a logical framework, news flow and immediate trade reactions are mostly useless as a general trading strategy. News trading is of course a viable method if the trader adheres to some principles and rules in its practice (which we don’t concern ourselves with in this article), but news trading is not the logical and rational approach to trading based on causality that fundamental analysis is. Understanding the basics of fundamental analysis is of course crucial as you formulate your strategies, and it is also very important as you decide which brokers are the best forex brokers for you, as you begin your career and acquire experience. We all need to make sure that we choose the best tools, and the best broker based on what we expect from trading, and forex trading is no exception to this general rule.       

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