The Role of Fundamental Analysis in Forex Trading

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Fundamental analysis is not very popular among speculative traders. They believe it’s useless, arguing that “price includes everything,” and adding fundamentals only makes things worse. In forex trading, if you ignore fundamental analysis and focus solely on price trends, can you really prepare for risk control before major data releases?

Knowing the fundamentals, you can also know whether there’s market activity recently. If the major markets are on holiday for several days and the news is light, what’s the point of sticking to technical analysis? Fundamental analysis is often equated with the following news: buy on good news and sell on bad news. How can this be called analysis?

The conclusions of fundamental analysis must be forward-looking and also consider historical perspectives on specific data. Otherwise, how can you easily draw conclusions in isolation? Equating fundamental analysis with just checking news and data forecasts is like knowing the current price is technical analysis.

To clarify the real meaning and market impact of fundamental analysis, I propose renaming it “driving analysis.” Unlike vague fundamental analysis, driving analysis shows how to find mainstream capital movements before others. After all, mainstream funds don’t play intraday trading; their volume requires time to move in or out, and they wouldn’t dare go against major trends driven by basic economic conditions. The UK government’s failure to maintain high interest rates for the pound despite economic conditions is an example; hedge funds wouldn’t invest against severely deteriorating fundamentals just because of a favourable technical pattern.

Although price absorbs some information, it’s when the public and mainstream funds realize something. If the price included all information, financial markets would be perfectly efficient, and there would be no profit to be made. If prices were always reasonable, there would be no disagreements, and no trades.

Most fundamental analyses in forex trading are poor—not just in effectiveness but also in content and form, seeming not on par with technical analysis. Why? There are several reasons.

Firstly, many analysts aren’t trained in macroeconomics; many joined this profession midway. However, it’s a good trend that more economics graduates are becoming forex analysts.

However, mainstream forex analysts aren’t skilled in macroeconomics; they struggle to provide deep insights into exchange rate [trends](Draw Uptrend Lines in Forex Trading). So their reviews often just repeat financial market rises and falls, list bullish or bearish news, give a few technical prices, suggest buying on upward breakouts or selling on downward breaks—and that’s it. Often after reading these reviews, you’re still unclear about the conclusion—the more you read, the more confused you become.

Good forex analysts will develop an idea around a central concept; all other materials support this notion. Why can they do this? Because they see things clearly and understand the full context. Poor analysts are like people with indigestion; they don’t understand much but regurgitate it anyway, failing to transform scattered facts and data into something understandable.

Technical analysis is simpler; even with just trend lines and MACD, you can analyze market trends convincingly. Because fundamental analysis requires more effort, most analysts struggle with it. But actually, fundamental analysis isn’t bad; there are just few who do it well.

Technical analysis is like a cheap commodity—accessible to everyone—while fundamental analysis depends on individual conditions. However, effective technical analysis isn’t simple either; it’s just easier to appear professional than fundamental analysis.

According to Charlie Munger’s lattice theory, each additional perspective increases a trader’s advantage—how could it possibly make things worse? After all, both fundamental and technical analyses are market analyses; they complement each other. Analysis is a means of obtaining information; having more methods isn’t bad.

Thirdly, many forex traders lack the expertise to interpret economic conditions. Fundamental analysts may be too sophisticated for their audience who might not understand what they’re writing about and feel that fundamental analysis isn’t as close to price as technical analysis—the closer it is, the more directly it can inform trades.

Fourthly, fundamental analysis often lacks statistical and historical coherence. Discussing issues without context or background is like touching different parts of an elephant without seeing the whole picture. This situation has improved somewhat as some good websites have started charting economic data like DailyFX; now you can see technical trends in economic data.

Actually, fundamentals can be quantified, and once quantified, technical analysis methods can be applied. This also indicates that the two are not mutually exclusive. Economic data trends also have trends, and technical analysis tools can be fully utilized, such as moving averages and periodic analysis tools.

The fifth reason is that fundamental analysis focuses on reporting what has already happened, emphasizing explaining the price trends that have occurred, with insufficient forward-looking aspects. Technical analysts are bold and hope to predict, but actually, the predictive value of technical analysis is not significant. Its value lies in providing dissection tools for analyzing the market’s trading structure, with emphasis on providing support and resistance lines.

Fundamental analysis has great predictive value. However, in the current forex market, fundamental analysis focuses on what has happened in the past or simply lists the financial calendar. The lack of forward-looking perspective means it fails to grasp recent mainstream trends and potential emerging hotspots, and thus cannot find the biggest unilateral trends.

The sixth reason is that fundamental analysis for retail forex traders has long lagged behind technical analysis, lacking basic analysis strategies that are convenient for retail traders to adopt. Some statements and data are reported as fundamental analysis; at best, a few sentences of bullish or bearish analysis are added, or expectations are compared with actual values. The development of forex fundamental analysis is basically still at the stage of textual narration; in fact, like technical analysis, it can form certain tools and patterns, and even quantification is not a difficult task. However, few people are willing to operate in this way, mainly because it is much more difficult to start than technical analysis.

The seventh reason is that the current fundamental analysis lacks systematicity and globality. News is listed here and there without a centre or organized logic. We do not know which factors have a greater or longer-term impact. After reading it, it feels like half is talking about bullish factors and half about bearish factors. The result of reading currency reviews is inconclusive; ultimately nothing is gained, feeling less concise than technical analysis which is straightforward and direct, lacking clarity and uniqueness.

To solve these problems, the key lies in processing complex information through a model to ultimately get a clear and instructive answer. This answer should tell us about the direction of capital flow and the currency pairs most likely to show unilateral trends; this is the essence of fundamental analysis.

Over some time, like the stock market, there will be a phase of hotspots in the international forex market. You need to learn to intervene at the beginning or middle stage of hotspots; if you wait until the hotspot is widely known before intervening, you will be the last one holding the baton.

Fundamental analysis can help you plan for the long term; psychological analysis can help you resolve immediate worries; technical analysis can take care of the present. When you view these three interconnected market analysis techniques in this way, you can perform at your best.

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