Fundamental analysis is the use of economic data given out by government agencies, economic groups, and political and business leaders that effect the value of a country’s economy. These types of economic reports are usually released according to scheduled times and can be located using an economic calendar like the one found on this website.
Understanding the economic calendar is central to being able to conduct fundamental analysis. Here’s an example of the calendar that is located on this website.
Since the market reacts to the most recent economic news events it is crucial that you begin each week of trading by taking a look at the upcoming news events for that week. As you look at the calendar you will see scheduled times of upcoming events as well as previous figures and forecasts for future ones. But the most basic thing you should take note of would be the impact of the news event symbolized in the above image as yellow, orange, and red symbols. Basically the red ones are the ones you watch for, the rest are less likely to move the markets in a major way although they can reinforce the bigger picture. The biggest mistake new traders make is not doing this and getting stopped out of a trade when a news event hits the airwaves that was predicted all along.
Things to watch out for with economic news.
1) The biggest news events: interest rate decisions, employment data, and GDP. But you should always check the significance indicator located by each news event since there are too many to mention for the purpose of this article.
2) Be aware that the forecast number is not always accurate, sometimes its WAY off! So lets say you have been following a huge uptrend with the Euro and you check in on the upcoming news events of the week and see that forecasts look great and so you continue to buy into the EUR/USD. If the real numbers come out worse than the forecast ones and you aren’t paying attention to the release, the uptrend that was once your grave train has now become a thing of the past. Bottom line is be aware of not only forecast numbers but actual ones as well. You can get these numbers as they’re released by visiting the economic calendar right after the event; actual data gets posted as soon as its available.
3) Sometimes the reaction to the event is not what you would expect. Trying to just trade off of the news events that are known to be big market movers is risky business and I would not advise doing so. It’s actually smarter to wait at least an hour after a news event before jumping into the market. This is due to many complicated factors that no retail trader can ever predict. Also the effect that a news event has on liquidity, the ability to process buy and sell orders immediately, is the biggest pitfall to trading the news. Brokers are not required to fill your orders exactly as they were quoted to you during news events and this is usually stated in their terms of service agreements. What that translates into is you could place an order at 1.5000 then see it actually went through at 1.5015, this is what is referred to as slippage and it hurts, especially if the high volatility that big news events create turns against you. When there’s more activity in one direction than normal the price action can skyrocket, so long story short don’t trade the news. If you truly want to still try and trade as close to the news release as possible I highly recommend reading my post regarding trading the news here.
4) Lastly, fundamental analysis is one part of predicting market trends, so you may find that sometimes the forex market does the opposite of what it should be doing. This is because technical analysis and psychology of the markets plays a large part in what takes place as well. As you become more expereinced in your trading history you’ll find its easier to read what’s taking place when this happens. But one short and simple rule to take away from this lesson would be this: If fundamentals and technicals agree, go for it with certainty. If fundamentals and technicals don’t agree, stick to the technicals but be cautious.
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