Best Approach to Fundamental Analysis(3 simple steps)

 Most people try to avoid Fundamental Analysis as much as they possibly can when it comes to interpreting the financial markets. One of the main reasons I have heard is, people say it's hard, complicated, and unnecessary. First of all, I think it's necessary, but when it comes to complications and difficulty, it depends on the approach you use. You may have heard of different methods to approach fundamental analysis, you were probably told, all you need is to look at the economic calendar each and every day and that's all you need, the calendar is a useful tool but, it's not our main focus when it comes to fundamental analysis. In this article, you will learn 3 simple steps you need to complete when looking for trades based off of fundamental analysis. Let.s jump to the first one

Finding the reason for the most recent price swing

When analyzing the currency market, looking beyond the current price and understanding the underlying reasons for the most recent price swing is important. We all have the benefit of hindsight right. Studying what happened is a piece of cake to most people as compared to what will happen. So why not start with the piece of cake, Identifying the reasons why markets were bullish or bearish. Why is this important? in short, this helps you identify whether the price will continue its underlying behavior or if the overall outlook has changed. What do we mean? Let's take for example you are looking at your current fundamental analysis, and it is telling you to look for buys let's say in the GBPUSD, in such a case you must first look back at which way the price has been moving, and look for the most recent price swing. Pay attention to this! Once you identify your most recent price swing, be it bullish or bearish, research and find the reasons why that move has occurred, if it was selling off look for that reason, and do your research. Once you do that, ask yourself, has anything changed? Has the reason for the most recent price move changed, if not then you probably want to see the price continue in its underlying direction. If it has changed, you might want to do your research on which fundamental driver is currently dominating the markets, and identify if it's positive or negative for that pair. Once you consider all this everything becomes easy and we can easily move on to step 2

What is the bigger picture fundamental outlook?

 Day-to-day price fluctuations are mostly influenced by market sentiment, which we will largely talk about in later articles. Even though market sentiment might move prices higher or lower, in the long run, the overall direction is mainly due to the bigger-picture outlook. What do we mean by bigger-picture fundamental outlook? It is the fundamental factor that is influencing the market direction in the long run. Normally when we look at the bigger picture, we want to be paying attention to the elephant in the room. In this case, the central banks are the big guys, we need to pay attention to what they are thinking and behaving. Central Banks have quite a number of tools that they use to control economic growth, one of them that they mostly use is Monetary Policy. When considering this tool in your analysis, ask yourself, what is the central bank most likely to do with their monetary policy, and whether is it likely to be positive or negative for that particular currency. So having that knowledge on you means that you have market expectations in the palm of your hand. We will explain in detail how to interpret Monetary policy statements, it's not that hard, and this whole process is not even hard, we will share many tools that you can use to ease the process, all you need is to know what's positive and negative for currencies. After that, you then move on to the last step.

Finding a Good Entry Point

This part is easy for most forex traders, as it involves technical analysis, yes. technical analysis is crucial when finding your entry point. Normally it's ok to use any technical analysis strategy that you have adopted and mastered as you probably know which direction the market might be going anyways, but if you want to have an extra edge on the technical side as well and know exactly how we do it, just visit the Technical Analysis section on this website to learn more. Once you find an entry point you can easily manage your trade from there. 

If you want to see an example of this approach, read the article, How we combined fundamental analysis & technical analysis to catch this CADJPY swing trade