Pros and Cons of Fundamental Analysis

There are two groups of traders: fundamentalists and technicians. Fundamentalists are traders who use fundamental analysis to predict price movements, while technicians are traders who use technical analysis to predict price movements. Of course, many traders use both types of analysis.

Today let’s talk about fundamental analysis based on economic factors.

Fundamentalists assume that the supply and demand for currencies are a result of observable economic processes. So they observe the economic, social, and political forces that drive supply and demand. They believe that by observing all kinds of indicators they can predict price movements.

Since currency prices are a reflection of the balance between supply and demand for currencies, traders can predict price movements by analyzing different data such as interest rates, trade balance, foreign investment, GDP, and others. The problem is that there is a huge amount of data to analyze. Fundamental analysts can study any criteria except price movement. Different fundamental analysts look at different economic indicators, but the most important ones are economic growth rates, inflation, unemployment, and interest rates. Especially interest rates and data on international trade are analyzed very closely.

Fundamentalists know when different economic indicators will be released. They usually have calendars in which they note the date and time when different important statistics will be made public.

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By learning and observing the different fundamentals of the markets we can increase our knowledge and understanding of the global market. By doing fundamental analysis we can predict economic conditions very well. We can also get a clear picture of the overall health of the economy. We will know what is going on. These are the reasons why we should not completely ignore fundamental analysis.

But there are some problems with fundamental analysis. Fundamental analysis often doesn’t give us specific entry and exit points, so trades can be quite risky. It is very difficult to find a method of translating all the different information into the specific entry and exit points for a particular trading strategy. There is so much information that it is easy to get confused.

This is why many traders use some fundamental analysis to understand unexpected movements of prices and know the forces that move them, but they use technical analysis to decide when to enter and exit trades.