We are frequently asked whether it is necessary to have an understanding of fundamental analysis and although it is a very important topic, it is a subject widely misunderstood by many traders.
To use the Stealth Forex Trading System™, it is not necessary for you to study market fundamental information at all. However, if you want to really sharpen your game, at least a basic understanding of fundamental analysis will help you.
If you intend to add fundamental analysis to your forex trading strategy you will need to be aware of what actually drives the forex market – interest rate(1) The price of one currency in terms of another, normally against USD. (2) Assessment of the credit worthiness of an institution. differentials, political stability, GDP, balance of paymentsA systematic record of the economic transactions during a given period for a country. (1) The term is often used to mean either: (a) balance of payments on "current accountThe net balance of a country's international payment arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows." or (b) the current accountThe net balance of a country's international payment arising from exports and imports together with unilateral transfers such as aid and migrant remittances. It excludes capital flows. plus certain (longer term) capital movements.
(2) The combination of the trade balance, current balance, capital account and invisible balance, which together make up the balance of payments total., inflationContinued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels. etc. Then you will need to understand that as each piece of fundamental information changes the market will react to that change.
Where many traders make a mistake with trying to understand the fundamental information is that they look too closely at the information itself, when what they should be trying to gauge is how the market will react to this change. This is market sentiment.
Let us take a hypothetical case.
Let’s say that in the past, each time the FOMCFederal Open Market Committee, the committee that sets money supply targets in the U.S. that tend to be implemented through Fed Fund interest rates etc. has announced a rate(1) The price of one currency in terms of another, normally against USD. (2) Assessment of the credit worthiness of an institution. increase of 0. 25bps the dollar has strengthened immediately after that news release. So why is it that this time when they announce a 0.25bps increase, the dollar takes a sharp decline.
It is because the market had believed, for whatever reason, that the FOMCFederal Open Market Committee, the committee that sets money supply targets in the U.S. that tend to be implemented through Fed Fund interest rates etc. would raise rates this time by 0.50bps and so the 0.25bps is a disappointment to the market and as a result the dollar gets sold off.
That is why it is so important to understand the fundamentalsThe macro economic factors that are accepted as forming the foundation for the relative value of a currency, these include inflationContinued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels., growth, trade balance, government deficit, and interest rates. but to pay even more attention to market sentiment.
I am not an advocate of making trading decisions based on fundamental analysis, as I prefer to system trade, but a good grounding in fundamental analysis will help you to assess which strategy to use and more importantly, it will help to give you a better understanding of when not to trade.
There are a vast amount of books, newsletters and websites dedicated to the study of fundamental analysis. I recommend that you make a search of them and do some studying, but here are two sources to start you off.
Forex Daily Fundamental Reports at Action Forex
The FundamentalsThe macro economic factors that are accepted as forming the foundation for the relative value of a currency, these include inflationContinued rise in the general price level in conjunction with a related drop in purchasing power. Sometimes referred to as an excessive movement in such price levels., growth, trade balance, government deficit, and interest rates. Of Forex FundamentalsThe macro economic factors that are accepted as forming the foundation for the relative value of a currency, these include inflation, growth, trade balance, government deficit, and interest rates. by Justin Kuepper at Investopedia
