Between the two main schools of thought for analysing the financial markets, technical analysis often trumps fundamental analysis. If you look around, technical analysis is more widely quoted than fundamentals. And almost any forex trader you meet is more likely to learn about the technical indicators rather than the fundamental analysis.
Part of this is because traders prefer to make a quick buck rather than wait and invest in the long term.
Technical analysis is the study of past price history to predict future price action. In combination with the volatility in the currency markets and the use of leverage to help traders maximize their profits, traders make their gains.
You will, therefore, see many traders focusing on building a trading system, or looking for an automated solution. They do this to take advantage of technical analysis for the mere purpose of maximizing the returns from forex trading.
The Problems with Fundamental Analysis
Meanwhile, fundamental analysis is often relegated to the background.
This is primarily because fundamental analysis is regarded as being complex. Plus, the impetus to using fundamental analysis is also lesser.
Traders ignore fundamental analysis, or perhaps give it less relevance as it is the study of the factors behind the price behavior. After all, who would want to spend time learning what the reason is behind every move?
The markets are irrational most of the time. Thus, in a way, technical analysis makes more sense.
With most of the traders in forex being day traders, it is not surprising that most of the media focuses on the technical charts. However, as a quick comparison, if you look to the equity markets, you will find that fundamentals are more often quoted.
This is due to the very nature of the equity markets. The stock markets usually have a majority of investors who are long term investors (via the 401k plans, etc.).
Thus, fundamentals tend to outshine technical analysis when it comes to stocks. To add to this, big names such as Warren Buffet who make use of value investing, a niche form of valuation. And this also adds to the weight of the argument.
Secrets of Fundamental Analysis
That being said, fundamental analysis does have its own flair. It can make you gain an edge in the market.
Simply put, fundamental analysis is all about forming an opinion about the markets. Sometimes, the opinions formed can be contrary to the general expectations. Here are a few things to help you get started when it comes to fundamental analysis.
You can call these secrets, but it is just common sense.
- Buy the rumor, sell the news: This phrase is something every forex trader has come across. But if you give it some thought, you will see that in many cases, the markets have a different perception than the policymakers. When there is a big disconnect between the expectations and the actual outcome, you can gain an edge here.
- Look at the longer term trends: Fundamentals often hit the headlines, but for the wrong reasons. For example, the February jobs report made big headlines. If you read that news release in isolation, you would be led into believing that the US economy just jumped off a cliff. But the long term trends give you better insights.
- Everything is inter-related: With the markets today, what happens in Asia has an impact in Europe and in other markets too. With the markets so closely interlinked, fundamental analysis can help you in anticipating some big moves. For example, a dovish message from the Fed often pushes US equities higher. You can also expect to see a similar performance from Asian and even European equity markets too.
The above three points might seem minor, but when applied correctly, they can yield a ton of information. Traders often want to find an edge in the markets. They focus on gaining this edge by testing new methods of both trading and of technical analysis.
But if you spend some time trying to understand the fundamentals, there is a good chance that you will find an edge. The trick, of course, is in trusting yourself with your analysis. This is something that will come only with practice.