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Published On: Sun, Dec 16th, 2012

Forex Strategies based on Sound Fundamental Analysis

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Expert consensus strongly advises that you need to attain or develop a strategy in order to improve your Forex prospects. You will find that many investors employ fundamental analysis to assist them in achieving this goal. This type of price analysis tries to predict future currency movements by studying economic, environmental and political changes that will affect their directional movements.

In other words, when you use fundamental analysis strategies, you will be attempting to determine how political and economic events will influence currency pairs. Consequently, you will need to master how to detect and then assess the publication of vital news releases and information in order to evaluate their influences on Forex. Such items of interest are economic growth predictions, interest rates changes, political developments, new economic policies and inflationary impacts, etc.

You will also need to monitor the relevant statements and figures contained within key speeches presented by leading politicians and revered economists. Specifically, you must focus on any important announcements concerning American politics and economy since they will generate the biggest influences on Forex. For instance, important press releases produced by the Chairmen of the USA Federal Reserve Bank and the US Secretary of Treasury can generate dramatic movements in currency pairs.

You may already be aware that the currency of a country appreciates in value against other national currencies in response to better-than-expected economic data releases whilst it falls when key indicators fail to meet analysts’ expectations. Consequently, you will need to monitor an extensive range of facts relating to the performance of a nation’s economy in order to predict the movements of its currency in relation to others. For instance, you will need to evaluate governmental strategies and future objectives together with crucial economic indicators such as the unemployment rate, durable goods orders, industrial production, international trade, CPI and Gross Domestic Product, etc.

After you have studied all this information, you will then need to devise a strategy that will assist you in assessing their impacts on the current and future trading patterns of all applicable currencies. If you can attain these targets, then you will be in a prime position to evaluate whether a currency will climb or drop against others on Forex. Consequently, if you intend to exploit fundamental analysis then you will need to concentrate on assessing how vital economic and political developments world-wide will impact the directional movements of price.

You also need to acquire deep insights into fundamental analysis in order to be able to exploit it fully. Market analysts recommend that you can attain this objective by merging fundamental considerations with those of technical analysis in order to create a trading strategy.

Novices have a tendency to seriously overestimate their skills in trading fundamental events successfully. They mistakenly think that they possess the ability to forecast the outcomes of their trades with deadly accuracy. Unfortunately, this is not the case because their trading psychology often contains many flaws such as the following

1.       They tend to focus on their profit potential only by ignoring downside risks.

2.       They think that all their new trades will be winners and make them rich.

3.       They fail to realize that they will achieve greater success if they aim for more realistic targets.

4.       As they possess such high profit expectations, they often become quickly demoralized after they have experienced a sequence of consecutive losses.

Economic data releases can sometimes generate significant price spikes although the reason why this happens is not always obvious. However, under such circumstances you must not jump to the conclusion that the market is hot and immediately start opening new positions without prior analysis. You will find that such actions are not a very good idea and can generate serious losses especially if you do not fully comprehend the prevailing market conditions.  Sadly, many novices do just that.

As you can now conclude, traders, especially novices, should not attempt to trade economic data releases unless they can use a well-proven Forex strategy based on fundamental analysis. You must always remember that the only factor that is predictable about Forex is that it is totally unpredictable. However, if you adopt a professional approach, then trading fundamental events can produce impressive profits because of the levels of volatility associated with them.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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