What is Fundamental Analysis

Fundamental analysis hinges on the concept that all currency pairs find their price based on the underlying strength or weakness of a particular currency. The strength or weakness, the fundamental analyst might argue, is determined by the economics of currency pairs.

To put it simply, a currency that has a strong economy behind it will advance in value, while a currency that has a weakening economy behind it will lose value. A fundamental analyst will not bother to check how a currency pair’s price is affected by past history, but how the future might play out for a currency pair.

Fundamental Analysis 101

The basic idea of fundamental analysis is that at any time one currency is strengthening against another while another is weakening against another. Fundamental analysts project future currency prices by staying on top of the news, exploring new economic events and releases, and making projections about how economics will affect a currency’s price.

The goal of the analyst is to:

• Make sense of available data
• Discover which data is actionable (can you make a trade based on this data?) and which isn’t.
• Understand how information affects the market, and whether or not a piece of information is good or bad for the market.

Generally, fundamental analysts tend to look for the big picture, and tend to hold positions for longer times than a technical trader. In the following sections, you’ll learn about the important economic news to look for. You’ll also get a better understanding of how the foreign exchange market works, why it works, and how prices are determined in the market.

In this chapter, focus on understanding what we have put together on each concept. At first, these concepts may seem difficult to digest, but if you read through this chapter in full, just as you have the last chapters, we promise that it will all “click” and the concepts will come together in the end.

For fundamental traders, it’s all about the news. We’ll explain the importance of the news in the following sections.