One of the most popular options for predicting the volatility of prices on Forex is and remains fundamental analysis. It is the opposite of another well-known type of market analysis - technical analysis, although both of them can be used in combination.
Fundamental analysis is the study of price changes with the help of an in-depth study of many factors, including financial, economic, political and many others, their interconnections and the impact on changes in exchange rates
The principle of fundamental analysis
Fundamental analysis is based on the opinion that currency prices on Forex are a reflection of supply and demand, which are determined by fundamental factors of the economy. This is the key difference between fundamental analysis and technical analysis, where the main emphasis is on the study of price history, and fundamental factors have no effect on supply and demand in the market. Fundamental analysis is especially popular among traders who prefer long-term trading, as it takes into account macroeconomic and political events and their consequences, which occur weekly. At the same time, it is practically useless for short-term trading, with the exception of trading on the news, and does not take into account short-term market fluctuations. Fundamental analysis takes into account a variety of macroeconomic parameters, major political events, rumors and news related to economic topics, the behavior of a market crowd that affects price changes and gives predictions about its future movement, solely as part of a long-term investment strategy. Such trading operations usually take at least three months.
The main disadvantage of fundamental analysis is its complexity, because the number of fundamental factors can amount to dozens and it is not practical to analyze all their interconnections. This is one of the main reasons why only 10-20% of traders use fundamental analysis.
Before using fundamental analysis, it is necessary to study the currency that will be traded, as well as all economic events associated with this acurrency. A convenient tool in fundamental analysis is an economic calendar.
Fundamental factors that influence market changes are divided into:
Fundamental analysis focuses mainly on the interest rate of the currency. Also, many other fundamental factors are taken into account, such as GDP (gross domestic product), inflation, the rate of economic growth, industrial production indices, the volume of industrial orders, retail sales, loan volumes and many others.