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Understanding the process of fundamental analysis in Forex

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Have you ever noticed that the price of currency pairs or any commodity, in general, accelerates rapidly after any sudden news releases? If your answer is yes, then we can say that you have a bit of an idea of the fundamental analysis of the trading industry.

Now, what is fundamental analysis?

You must be aware of what technical analysis is here. Technical analysis is the study of how the market works and how to read the market and calculate the trading numbers. Technical analysis is a must-do activity of the investors as it helps to know the best points to enter trades. When you analyze the market and read the charts, you will be able to see when the best time to execute your trade is.

Despite having good market research, you may find out that the market is not going according to your speculation. You had good research and used some effective strategies then why didn’t the market go the way you assumed. Then was there anything wrong with your preparation? Well, no. It is more like you missed some important events. These events may be some economical events or some international events which are promising enough to shake the whole financial industry.

Now, some of these events can be very sudden while some of them occur over a specific period of time. Studying such events is called doing fundamental analysis. Fundamental analysis includes looking out for such occurrences, making assumptions, and speculating about the market accordingly.

Fundamental analysis

Fundamental analysis is as important as technical analysis and, in most cases, these are the driving forces behind a shifting market. You must be aware that the value of any commodity goes up or down due to supply or demand. But if there remained a balance between consumers’ needs and the supply, then the market wouldn’t have been dynamic. Various issues interrupt such balance and this initiates a change in the value of commodities in the trading market. Analyse the price movement in the CFD trading platform online right before the major news. You will be surprised to see how volatility increases right after the news.

Natural and geo-political factors can also create intense volatility in the market. For example, fin the event of a natural disaster, if the production of any agricultural product is hampered then due to less production, the supply of this product will decrease. However, in the opposite direction, the demand for the product will remain the same. Therefore, there will be an imbalance between supply and demand. As a result, the value of that product will increase. Now, if you are not smart enough to consider the natural factors and invest in buying that product, then, you will have to buy it at a higher price. That means you will be making less profit than usual.

Diversifying fundamental factors

There are several sectors involved in fundamental analysis. Some of them might take place overnight and might be predicted by no one. However, some factors are previously fixed and have a high potential to change the market. For instance, the GDP or the central bank decisions have a huge influence in moving the currency market. Again, the decisions taken by the CPI which are subject to news releases, are highly influential in making the agricultural market dynamic. Therefore, if you are aware of them beforehand, you will be able to predict if any change is coming or not. Based on that, you will be able to make any preparation you require.

But how do you tackle sudden news? Well, news is like an earthquake in that it comes without warning. But if you keep your eye on the news then you will be alerted whenever such events take place and you can act accordingly.

Therefore, as a trader, you will be in a much safer place once you can analyze the market both technically and fundamentally.  For fundamental analysis, you don’t need to do much and all you need is to do is keep watch on events and think smart.

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