Fundamental Analysis – The Pros And Cons

Fundamentalists and technicians are the two groups of traders. Traders who would use fundamental analysis in order to predict price action are fundamentalists while technicians are traders who use technical analysis to predict price action. A lot of traders, of course, would use both types of analysis.

What we can talk about is fundamental analysis which is based on economic factors.

As for the fundamentalist, they would assume that the supply and demand for currencies is a result of economic processes that can be observed. So, they observe economic, social, and political forces that drive supply and demand. They think that if they observe all kinds of indicators, then they can predict price actions.

Currency prices are a reflection of the balance between supply and demand for currencies, by analyzing different data, such as interest rates, balance of trade, foreign investment, GDP and many others and because of this, traders can predict price actions. The problem is that there is huge amount of data to analyze. Fundamentalists can study any criteria except price action. Looking at different economic indicators are different fundamental analysts but the most important are economic growth rates, inflation, unemployment and interest rates. This is true to data that is related to interest rates and international trade is analyzed very closely.

What fundamentalists are aware of is when different economic indicators will be released. They usually have calendars where they note the date and time when different important statistics will be made public.

By learning and observing different fundamentals of the markets we can increase our knowledge and understanding of the global market. By doing fundamental analysis we can predict economic conditions very well. Also, we have a clear picture of general health of the economy. We will then know what is going on. Because of these reasons, we should not completely ignore fundamental analysis.

There are problems when it comes to fundamental analysis. Most of the time, fundamental analysis does not give us specific entry and exit points, so the trades can be pretty risky. It is not that easy trying to find a method of translating all of the different information into specific entry and exit points for a particular trading strategy. It is easy to be confused because there is so much information.

Because of this, there are therefore many traders who use some fundamental analysis to understand unexpected movements of the prices and to know the forces which move them, but they use technical analysis to decide when to enter and exit the trades.

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