Fundamental analysis is one of the most popular forex market analysis methods among traders, because it does not need to use too many tools like technical analysis.
However, for effective analysis, investors must have basic knowledge of economics, politics, micro and macro finance… So specifically, what is fundamental analysis? How is it different from technical analysis?
Table of Contents
- 1 What is fundamental analysis?
- 2 Difference between fundamental analysis and technical analysis
- 3 Important factors when doing fundamental analysis
- 4 Advantages and disadvantages of fundamental analysis
What is fundamental analysis?
Fundamental analysis in the financial market is generally a method of determining the intrinsic value of an asset, through the assessment of internal and external factors such as economic, social, political, financial… From there, making forecasts of future price movements.
The purpose of fundamental analysis is to assess whether an asset is being overvalued or below its intrinsic value. If it is higher, the market will adjust to a lower price in the future, and if it is undervalued, the market will adjust the price up so that the asset reflects its intrinsic value.
In Forex, fundamental analysis usually looks at the economic factors that affect the valuation of a country’s currency. If it is good, the value of the currency will strengthen, attracting the interest of many foreign investors and businesses to invest in that country.
The increased demand for currency conversion to buy property in a country indicates that the currency of that country is more valuable.
Difference between fundamental analysis and technical analysis
In the forex market, there are 2 schools of technical analysis and fundamental analysis. Each method will have its own advantages and disadvantages and is suitable for different subjects. To know which analysis method you are suitable for, please refer to the comparison table between fundamental analysis and technical analysis below:
Important factors when doing fundamental analysis
Usually, when participating in forex trading, traders are often interested in major currency pairs (containing the US dollar). Therefore, when doing fundamental analysis, investors need to analyze the factors that can affect the rates of these currency pairs.
Especially the factors affecting the US dollar, because the USD is the strongest currency, having a great influence on the currencies of other countries.
There are many factors that affect the rate of currency pairs in forex. However, in this article, Tradervn will focus on analyzing 3 main factors that have a great impact on the currency value of a country, which are:
The value of a country’s currency will depend on how strong that country’s economy is. If the economy of that country develops strongly, of course the value of that country’s domestic currency will increase and vice versa. To assess the economic situation of a country, we will consider indicators such as interest rates, inflation, GDP, unemployment rate ..
Interest rate is the most important indicator that can affect the price of currencies especially the discount rate. This is the type of interest rate at which central banks lend to commercial banks. Commercial banks will take that as a basis to set and adjust interest rates for individuals and organizations.
When interest rates rise, banks have to increase their reserves. Thus, the loan amount will decrease and the loan interest rate will increase. Conversely, when the discount rate decreases, commercial banks can help businesses borrow at low interest rates. At this time, businesses will expand their scale, economic development will push up the price of the domestic currency.
However, in the long term, if lending a lot, it means that the amount of money circulating in the market will lead to inflation and the currency will depreciate. If interest rates rise, the local currency will also rise.
Inflation is the rate at which the prices of goods and services increase. The main cause of inflation is too much money in circulation. At this time to balance the central banks will control interest rates so that the national currency can appreciate.
Based on this indicator, traders can predict the uptrend or downtrend of a certain currency. However, it must also be noted that Forex trading always goes in pairs, so it is necessary to analyze both currencies as a whole to make a reasonable choice.
The increase in unemployment rate shows that the business activities of businesses are not performing well, do not expand and are stagnant… In the long term, this will affect the economic health of a country and obviously the internal price. will also decrease. Conversely, if the unemployment rate is low, it means that the production facilities are expanding, the country’s economy is good, so the price of the local currency will increase.
GDP – Gross Domestic Product
GDP is a measure of all the goods and services produced by a country during a particular period. Investors can rely on the growth rate of GDP to determine the level of growth of the economy. However, it is also important to remember that an increase in GDP does not mean that a country’s economy is good.
Because if the quantity of goods produced is high but cannot be sold, the goods will remain in stock, the money will be negative in one place, and the business will suffer. That will lead to economic stagnation. Therefore, when evaluating, investors need to consider two more factors: supply and demand.
The political factors of a country include: laws, management apparatus, military, protests, strikes… All of these factors affect the value of that country’s domestic currency.
A country with a bad political situation or frequent occurrence of negative social events such as protests, riots, military conflicts, etc. will greatly affect the economy and depress the economy. weak value of the domestic currency.
In addition, important events such as the election are always of interest to investors, especially the results of the US presidential election, because it not only affects the economy and politics of the US but also affects the US economy. affects many countries around the world.
Political factors often have a lighter impact on the value of the local currency than economic factors, but are still more important in the long run.
Unexpected events such as natural disasters, storms, floods, tsunamis, etc. also greatly affect the economic status of a country, thereby reducing the value of the local currency.
Fundamental analysis tools in Forex
For fundamental analysis, investors will usually use available information sources, including:
For economic factors
Economic indicators such as interest rates, inflation, GDP, unemployment rate … investors can monitor through monetary policy, interest rate announcements of the central bank, the Ministry of Finance… If you want to follow US economic and financial news, you can watch it on US mainstream media such as: Bloomberg, CNN, Fox News, CBS…
In forex, the currencies investors are most interested in include: USD, EUR, GBP, JPY, AUD, CAD, CHF, NZD. Therefore, investors can follow the information of the central banks of those countries through: FED, ECB, BoE, BoJ, RBA, BoC, SNB and RBNZ.
Regarding socio-political issues, investors can follow through on mass media, social networking sites, newspapers, etc. to capture timely information.
This is an indispensable tool for fundamentalists. The economic calendar will provide information on economic indicators of all countries in the world, including: time, impact on the value of that country’s local currency…
Currently, most exchanges have a tool that integrates this information, the economic calendar. Investors only need to update the information on the economic calendar to know important data of a country. From there, filter out the necessary information to serve your analysis.
Advantages and disadvantages of fundamental analysis
Any analytical method has certain advantages and limitations, and fundamental analysis is no exception. To help people better understand forex fundamental analysis, below we will make comments about the pros and cons of this analysis method.
- Support predicting long-term trends quite accurately.
- Important news often causes a strong impact on prices. If you are quick, you can seize the opportunity to make more profits. Or it can also react in time to minimize the risks.
- Not suitable for short term trading or scalping strategies.
- Not suitable for inexperienced traders.
- Must spend a lot of time reading news and be quick to information
Above we have introduced what fundamental analysis is, the pros and cons of fundamental analysis in forex. Hopefully, these shares will provide useful information and help investors find the right forex market analysis method for them.