The Basics of Fundamental Analysis

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Traders typically fall into either of these groups: the fundamental analysts and the technical analysts. In general, technical analysts are those who use price charts to determine whether to buy or sell currency. We already discussed this subject in detail on a separate post, so we will focus instead on the other school of thought, which is fundamental analysis.

What Fundamental Analysis Is

While technical analysts are concerned with trends displayed on the price chart, fundamental analysts analyse the economic health of countries whose currencies they trade. They do this by analysing relevant economic data such as employment figures, the gross domestic product, and the interest rate set by the country or region's central bank.

Let us say for example that a trader is trading the AUD/USD currency pair. The trader also knows that Australia is a major trading partner of China, since the former feeds the latter's huge appetite for iron ore and coal. So when the Australian government announces that China showed a decreased demand for these products in the past month, there would be a ripple effect on the Australian economy. This could then eventually lead to lower interest rates in the long term, which could then lower the value of the Australian Dollar. With all these things in mind, the trader might decide to sell his AUD/USD pair before its value drops significantly.

Aside from direct economic factors such as the GDP and interest rates, a fundamental analyst may also take into consideration political developments, government policies, and other events that may affect the currency they are trading.

Because events matter greatly to fundamental analysts, they take a close watch at economic calendars. These calendars show announcements that would be made by respective central banks and government institutions. Going back to the example of the trader of the AUD/USD pair, he would likely monitor announcements made by the Reserve Bank of Australia and the US Federal Reserve, which are the central banks of each respective country.

So is fundamental analysis better than technical analysis? No one can say for sure. What's important is that you, as a trader, look at these methods of analysis as tools. It then depends on you which tool works best for you.

By FX Strategy Team, Published on 19th of April 2013
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