Fundamental Analysis: Definition and Example

Fundamental analysis involves the study of the key elements which drive and influence a country’s economy. A forex trader who uses fundamental analysis in order to trade the market will attempt to predict the movement of a currency pair (or any other asset class) by analyzing a variety of economic indicators and news events, including a central bank’s interest rate and monetary policy.

Traditionally, traders have been described as either ‘fundamental traders’ or ‘technical traders’ – with the common perception that a fundamental analyst would never look at a currency chart before taking a trade, and a technical trader would never take any notice of an economic news event or indicator before placing a trade.

In practice, however, the lines are slightly more blurred than this, and the vast majority of successful traders will be more open minded in their trading analysis. Thus, for example, a technical trader will be very aware of upcoming major economic news announcements – because although he may make the final decision to take a trade based on technical indicators, and his analysis of the charts, he will be aware that major news decisions, such as interest rate announcements, and the monthly US job figures have a huge impact on the currency markets.

Similarly, a fundamental trader will also take note of any technical reasons which may affect his trading decision – for example,  he may be very bullish on EUR/USD, but if a technical indicator is showing that price very overbought, or if the charts show that price is currently at a very strong resistance level, that fundamental trader may put off his trade until the technical picture becomes clearer.

Fundamental or ‘News Traders’?

Many fundamental traders are often termed ‘news traders’ – ie they place trades as a result of economic news announcements which are made on a daily basis. Each country announces news events at predetermined dates and times throughout the year, and it is, therefore, possible for a forex or binary options trader to position himself or herself in the market to take advantage of these economic events.

Some fundamental or news traders will get in the market before the announcement, hoping to guess the right way the market is going to move, although this is a very high-risk strategy, and not suitable for the novice trader. The reason for this is that the currency markets are very volatile immediately before and after a news announcement, and inexperienced traders may get stopped out very quickly if the price moves against them if they get the decision wrong. Most fundamental traders will get in the market after the news has been announced – they will assess whether the news is positive or negative for the individual currency pair in question, and trade accordingly.

Trading the news is considered to be a very high-risk trading strategy because currency prices can move so quickly in such a very short time frame. It is therefore recommended to only use very small trade positions, whether a trader is trading spot forex or binary options. For a detailed list of economic news events, an interactive Economic Calendar is available at ImmFx.