In this post I’m going to talk about how you can start approaching fundamental analysis. This will include a step by step guide that you can take away and start applying today.
If you are a new trader or are confused by fundamental analysis, this post will help you understand it all much better.
Misunderstanding usually comes from the fact that fundamental analysis is perceived as complicated by most retail traders.
On top of this, many retail educators actively teach that the fundamentals are irrelevant or priced in. This article will explain why this happens and then give you some very simple steps to follow.
These steps will allow you to see just how powerful trading with the fundamentals can be.
Why The Fundamentals Are Ignored
Most retail educators will teach strategies that rely solely on technical analysis. They will also dismiss the fundamentals as ‘priced in’ and irrelevant.
The most common reason for this is down to the fact that technical strategies and trading robots are very simple to understand and easy to sell.
Imagine if you had a choice:
Your first option was to make money from a simple system that did most of the work for you. You just had to wait until the indicator turned blue to buy it, or red to sell it.
Even better it was coded into a fancy robot that did all that for you!
Your role would be to simply plug it in and then watch all that wonderful money piling up in your trading account.
The second option was to do all the work yourself.
This would include getting up early each day to study the latest news and figure out what the sentiment of the market was.
It would mean reading analyst research reports and studying the prices of currency pairs to determine the best way to trade them.
Obviously, pretty much everyone would choose the first option.
Because it is easy to sell, there is lots of money to be made. This ensures that these technical based systems, strategies and robots will continue to abound all over the internet.
Unfortunately, this does not mean that they work in the long run. In fact, most of them don’t.
Large Funds Trade With Fundamentals
The overwhelming majority of professional traders and investors use fundamental analysis as the core of their money making strategy.
If you see inside professional trading floors on the financial news channels you will very rarely see the traders staring at charts only.
They almost all use the big news terminals such as Bloomberg, Reuters, Dow Jones, MNI and more.
These terminals are solely designed to get news and information to those traders fast. They also cost thousands of dollars per month for each individual license.
This in turn means that large firms and banks are spending hundreds of thousands of dollars each month to access this information.
Price charts and technical indicators, on the other hand, are generally free.
There are some smaller funds or managers that do use solely technical analysis but you will struggle to find credible examples of more than a handful.
So, almost all professional fund managers trade with fundamental analysis and information. Almost all retail traders are trying to use chart based technical analysis.
So the first consideration is this:
If the overwhelming majority of famous traders and investors are trading with fundamental analysis, how can this be dismissed at the retail level as ‘irrelevant’?
The next thing to consider is the way in which the prices of currencies are driven when fundamental events happen.
The Fundamentals Drive Prices Directly
When things happen in the real world, the prices of currencies move in reaction. This is true both in the long term and short term.
For example, when the UK voted for ‘Brexit’ in 2016 the British Pound immediately dropped around 20% in value against the US Dollar.
This was a direct reaction by the market in response to the result.
The reason this happens is because professional traders are watching the news and then trying to react.
Everyone knew that if there was a ‘Brexit’ vote, the GBP would plummet in the immediate aftermath.
The markets move in anticipation of and in reaction to major risk events on a regular basis. You don’t have to be an expert trader to see that this is how markets move.
In fact, very often you can get a sense that this is happening from the mainstream news channels. They will cover market moves and explain the reasons behind them.
So the second consideration is this:
If it really doesn’t matter whether or not you applied the fundamentals to your trading, then why would the market move so heavily based on fundamentally driven risk events?
The final consideration when exploring fundamental analysis is the impact that it has on your psychology.
If you are completely new to trading then by the sheer volume of competing information and ‘strategies’ available may seem overwhelming.
As an experienced trader you probably feel frustrated with the cycle of switching that you have most likely fallen into.
The Trap Of Switching
Switching goes a little something like this:
You find a system that you think looks great. You carry out a back test and the results look incredible.
Of course, you’re all excited about how much money you will make by trading this system and start trading it on Monday morning.
By about Wednesday, the results you are experiencing are nothing like the back tested ones and you quickly lose faith in that particular system.
You immediately start searching online for a ‘better’ strategy that you can back test and trade the following week.
This cycle goes on and on as you constantly search for the next best system. If you have been in this cycle then you’ll know just how frustrating it can be.
And this is where a solid application of fundamental analysis will change your whole trading outlook forever.
Understanding these concepts is pretty much like removing a blindfold.
For the first time in your trading career you will understand what is going on and why currency prices move in the way that they do.
This was the biggest revelation to me when I was learning.
Understanding The Reasons Gives You Confidence
The difference it makes is all in your own personal confidence. Your whole attitude changes when you understand the reasons why you are taking a trade.
This improves further when you understand the reasons why the priced moved in the way that it did.
Even if your trade loses, you can accept it, because you understand why. You can analyse and find the reasons that the loss occurred.
On every single trade you will understand exactly what went right or wrong and how you could improve your results.
Your human brain needs explanations and reasons. The application of fundamental analysis will give you these explanations in your trading.
Getting Started With Fundamental Analysis
So how do you get started with understanding the fundamentals?
The whole aim of the training here is to simplify the concept of fundamental analysis. You will not become wildly successful and retire to the beach overnight.
If you focus on applying it with self-improvement in mind, then you will definitely see clear progression in your overall trading performance almost immediately.
So to keep it very manageable I will start by sharing some very simple steps that will allow you to begin your own learning curve.
This will help you to see for yourself how powerful the fundamentals can be.
Step 1 – Gather Your Sources Of Information
I use high level news and analysis data sources to deliver the information I need fast. These sources include the Reuters Eikon terminal and a real time news squawk from Ransquawk.
Before you commit to these expensive professional feeds you can gain some experience from some of the free sources available.
I have listed the best free sources of news and analysis to start working with as a beginner.
I strongly recommend that you bookmark them and check them regularly. Monitor how currency pairs move in relation to the news and events that you research.
Forex Factory is considered one of the best free news calendars on the internet.
It has a very user-friendly layout that is simple to navigate. Each week you should be looking at this economic calendar to see which events are coming out.
This will help you understand which currencies could be moving the most in the upcoming trading sessions.
FX Street provides a constant stream of free news and analysis. They have their own content writers and all of the information is practical for traders.
This will give you some clarity and understanding of how the economic releases and events you see on the calendar could impact the prices of the related currencies.
The team at Forex Live are a fantastic bunch of analysts that focus on delivering analysis of market- moving events as they happen. This almost real-time analysis is a powerful way to learn how fundamental analysis works
This will provide analysis and explanation of certain fundamental events and occurrences.
Step 2 – Learn How To Interpret What You Read
Understanding how to interpret and apply the news is a key component to successful trading. To simplify this you should look out for four key elements in any news article.
If you cannot extract the four elements then you should discard that particular piece of information until you have more knowledge and experience.
The first element of any article should be the currency (or currency pair) that the article is referring to.
A second element to look for is the overall direction that the writer expects the currency or pair to be moving.
The third element is a clear reason why there is an expectation for the specific currency to be moving in a certain direction.
There must be some fundamental catalyst to discuss in the article.
Finally, there should be a clear opinion or expectation about which way some credible experts think the currency could be moving next.
This normally comes from analysts or traders but can also be from economists.
These four things will allow you to develop a clear picture of the impact on any currency from a fundamental perspective.
This will give you trading ideas that you can practice and test.
Step 3 – Practice Trading Your Ideas
You will be surprised at how quickly trade ideas start revealing themselves. With practice you will start to spot more and more opportunities.
To become proficient you need to start taking these trades and monitoring their progress.
Trading with real money will ensure that you commit to each trade and monitor it much more closely.
This close following will actually benefit you because you will start to learn the intricacies of how the markets move in relation to fundamentally driven events.
This process will intensify your own learning curve and will show you just how powerful fundamental analysis is, when you apply it correctly.
Step 4 – Dedicate Time To Master The Fundamentals
By proving the power of fundamental analysis in this way, you will increase your own confidence. This will also confirm to you the potential that trading offers.
Having knowledge of what fundamental analysis is and how it works is only the beginning.
Your main source of progress will come from constantly improving your understanding of the many nuances of how the markets operate.
Very often, the markets will trade in the opposite direction to how they should, based on an economic release or event.
This can be frustrating and confusing but is also a perfectly normal part of the way that markets fundamentally operate.
By embarking on extra training you will get to grips with these details and see your results improve to the next level.
And there you have it…
A detailed look at the fundamentals and why there is so much confusion surrounding them in the world of retail trading.
You have everything you need from this article to go away and start applying the fundamentals. Please leave your questions or comments below this post, I regularly check and reply to each one.
If you are a professional investor or asset manager looking for exclusive access to institutional resources then our network can help.