CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.09% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
72% of retail investor accounts lose money when trading CFDs with this provider.
76.09% of retail investor accounts lose money when trading CFDs with this provider.

Proper understanding of Fundamental analyses for Short to Mid-Term Trading

Profile Picture
Author: Joseph Jeffriess

Fundamental analysis is a common method of analyzing financial markets, including the foreign exchange (FX) market. This approach involves examining economic, financial, and geopolitical factors that affect the value of currencies, and using this information to make trading decisions. In this article, we will provide an overview of fundamental analysis and explain how it can be used for FX trading.

What is fundamental analysis?

Fundamental analysis is a method of analyzing financial markets that involves examining various economic and financial factors that impact the underlying asset’s value. In the case of FX trading, fundamental analysis involves analyzing the economic and political conditions of the countries whose currencies are being traded. The goal of fundamental analysis is to identify the intrinsic value of the currency and to determine whether it is overvalued or undervalued relative to other currencies.

Factors to consider in fundamental analysis for FX trading:

Economic indicators: Economic indicators, such as gross domestic product (GDP), inflation, and employment data, provide insight into the health of a country’s economy. Strong economic growth and low inflation are generally positive for a currency, while weak growth and high inflation can be negative.

Interest rates: Interest rates can have a significant impact on currency values. Higher interest rates tend to attract foreign investors, which can increase demand for the currency and push its value higher. Conversely, lower interest rates can make a currency less attractive to investors, which can lead to a decline in its value.

    Geopolitical events: Political instability, social unrest, and geopolitical tensions can have a significant impact on currency values. For example, a country that experiences political turmoil may see its currency weaken as investors become more risk-averse and seek safer assets.

    Central bank policy: Central banks play a significant role in the FX market. The actions of central banks, such as interest rate decisions and monetary policy changes, can have a significant impact on currency values.

    How to use fundamental analysis for FX trading

    To use fundamental analysis for FX trading, traders need to stay up-to-date with economic and geopolitical news that may impact the currencies they are trading. They can use economic calendars to track upcoming events, such as interest rate announcements and economic data releases. They can also monitor news sources and social media platforms for updates on political and social events that may impact currency values.

    Traders can use fundamental analysis to form a view of the overall strength or weakness of a currency and to identify potential trading opportunities.
    For example, if a trader believes that a currency is undervalued relative to its peers, they may consider buying it in the hope that it will appreciate. Conversely, if they believe that a currency is overvalued, they may consider selling it in the hope of profiting from a potential decline in its value.

    Here are some examples of fundamental analysis for short-term and mid-term trading:

    Short-term trading:

    For short-term trading in the FX markets, traders may use fundamental analysis to identify short-term price movements based on news events, economic data releases, and central bank announcements. Examples of fundamental analysis for short-term forex trading include:

    • Economic data releases: Traders may analyze economic data releases such as Gross Domestic Product (GDP), employment data, and inflation reports to identify short-term trading opportunities.

    • Central bank announcements: Traders may monitor central bank announcements, such as interest rate decisions and policy statements, to assess the market’s sentiment and anticipate short-term currency movements.

    • Geopolitical events: Traders may also monitor geopolitical events, such as elections, wars, and natural disasters, to identify short-term trading opportunities.

    • Market sentiment: Traders may analyze market sentiment to identify short-term trading opportunities. Sentiment can be gauged through technical indicators such as moving averages, or through news and social media sentiment analysis.

    • Commodity prices: Traders may monitor commodity prices such as oil and gold, which can impact the value of currencies, especially those of commodity-exporting countries.
    A trader may analyze the latest economic data releases for the Eurozone, such as inflation and employment data, to identify short-term trading opportunities in the EUR/USD currency pair.

    Enhancing Your Fundamental Analysis Strategy

    As we’ve explored the core concepts of fundamental analysis for short to mid-term traders, it’s time to delve deeper and uncover strategies that can amplify your analytical prowess. By combining fundamental insights with technical analysis, interpreting news releases effectively, understanding currency correlations, and considering the nuances of behavioral economics, you’ll be equipped with a comprehensive toolkit to navigate the intricacies of the market. Let’s embark on a journey to enhance your fundamental analysis strategy and refine your trading decisions

    Below, we’ll expand on the foundation we’ve built and introduce advanced perspectives that can elevate your trading game.

    Correlation with Technical Analysis:

    Fundamental analysis and technical analysis are two cornerstones of effective trading strategies. While fundamental analysis delves into the underlying factors that drive market movements, technical analysis examines historical price patterns and trends. What’s intriguing is the synergy between these approaches. By combining fundamental insights with technical indicators, traders can craft a more comprehensive trading plan. For instance, a positive fundamental outlook for a currency might align with a technical breakout pattern on the price chart, reinforcing the likelihood of a successful trade. This convergence of factors often lends greater confidence to trading decisions, highlighting the value of a well-rounded analytical approach.

    News Interpretation:

    Interpreting news releases and announcements is a crucial skill for traders harnessing fundamental analysis. When news breaks, the market can experience sharp volatility. Yet, not all news has the same impact or lasting effect. Traders need to differentiate between short-term market noise and truly transformative events. Understanding market expectations plays a pivotal role here. If an economic indicator exceeds forecasts, the impact can be substantial if the market didn’t anticipate such a result. On the other hand, if an announcement aligns with expectations, the market reaction might be less pronounced. Successful traders leverage their understanding of news dynamics to gauge whether a move is a fleeting response or a signal of a more profound market shift.

    Currency Correlations:

    Currency correlations unveil fascinating insights into the interconnectedness of global markets. Certain currencies tend to move in tandem due to shared economic relationships or geopolitical factors. Recognizing these correlations can provide traders with an additional layer of information. For instance, if two currencies have a strong positive correlation, a trader observing a bullish setup on one currency pair might anticipate a similar movement on the correlated pair. Conversely, a negative correlation might signify that one currency strengthens as the other weakens. This understanding empowers traders to diversify their positions while managing risk more effectively. By incorporating currency correlation analysis into their toolkit, traders can gain a better grasp of potential market movements.

    Behavioral Economics:

    Behavioral economics introduces a captivating dimension to fundamental analysis. Market sentiment, often driven by investor psychology and herd behavior, can significantly influence currency prices. Traders who recognize these behavioral patterns can anticipate potential market reactions more astutely. For instance, during times of uncertainty, investors may flock to safe-haven currencies due to risk aversion, regardless of immediate fundamental indicators. Similarly, market euphoria can lead to currency overvaluations despite underlying economic weaknesses. Acknowledging the role of behavioral economics equips traders to navigate the complex interplay between rational analysis and emotional market dynamics, enhancing their decision-making prowess.

    Fundamental analysis is a valuable tool for FX traders looking to gain a deeper understanding of the factors that impact currency values. By analyzing economic and financial indicators, interest rates, geopolitical events, and central bank policy, traders can form a view on the overall strength or weakness of a currency and identify potential trading opportunities. However, it is important to remember that fundamental analysis is just one approach to analyzing the FX market, and traders should also consider technical analysis and risk management strategies when making trading decisions.

    * The information provided here has been prepared by Eightcap’s team of analysts. All expressions of opinion are subject to change without notice. Any opinions made may be personal to the author and do not reflect the opinions of Eightcap.
    In addition to the disclaimer on our website, the material on this page does not contain a record of our trading prices, or represent an offer or solicitation for a transaction in any financial instrument. Eightcap accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.
    Please note that past performance is not a guarantee or prediction of future performance. This communication must not be reproduced or further distributed without prior permission.