Fundamental Analysis Q&A for Beginners

The forex market is always influenced by fundamental analysis because currencies are at the center of all economic activities worldwide. Unfortunately, many traders still ignore fundamental analysis.

This is due to a lack of understanding of forex fundamentals, a reluctance to study theoretical economics, and the stereotype that technical analysis is much more accurate without having to delve into data.

In fact, fundamental analysis can help traders achieve optimal profits. Many successful fundamental traders have become wealthy relying on this analysis, such as Benjamin Graham, Warren Buffett, and George Soros.

However, why do many traders prefer technical analysis over fundamental analysis?

This question is often raised by beginner traders who are just entering the world of forex. Additionally, there are many other questions, such as which is better between technical and fundamental analysis, how to apply fundamental analysis, and how to achieve profits with fundamental analysis.

Well, for that reason, the following is a summary of a Q&A between a beginner trader and a professional trader regarding fundamental analysis in forex. Let’s take a look until the end.

A beginner trader (Q) has posed various questions regarding fundamental analysis to a professional trader (A). From the following fundamental Q&A, you will be invited to delve deeper into the application of fundamental analysis in forex trading.

Why Beginners Should Understand Forex Fundamental Analysis

Q: How important is fundamental analysis for beginner traders to learn?

A: Beginners who want to enter the forex world should understand fundamental analysis because it can provide a more complete picture of a country's economic conditions and its currency. By understanding fundamental factors such as economic data, monetary policy, and a country's political conditions, a trader can make wiser trading decisions and minimize the risk of losses.

Moreover, understanding fundamental analysis can also help a trader to identify long-term trends and avoid mistakes in choosing trading positions. This is because fundamental factors have a greater impact on long-term price movements compared to technical factors.

Using fundamental analysis can also help a trader make more rational and data-driven trading decisions, rather than just relying on speculation or intuition. Therefore, a good understanding of fundamental analysis can help beginners become more skilled traders and generate consistent profits in the long run.

Q: Fundamental analysis or technical analysis?

A: Some traders rely more on technical analysis and its indicators, while others consider fundamental analysis to be more important. However, neither is better than the other.

Q: Can fundamental and technical analysis be combined?

A: Yes. The combination of fundamental and technical analysis is very possible. Fundamental analysis is used to find potential forex pairs based on market sentiment, while technical analysis is used to find accurate entry and exit points. This technique was popularized by Simit Patel.

How to Profit from Fundamental Analysis

Q: As a beginner trader, we definitely want to achieve profits from forex trading. How can we utilize fundamental analysis to be profitable?

A: We can start with ourselves, by getting used to updating fundamental news and observing central bank statistics. However, we also need to understand the dynamics and era we are in, as the economic dynamics vary in each era.

Q: What do you mean by dynamics and era?

A: However, if our goal is to trade forex, we must at least know which part of the economic cycle or boom-bust we need to understand. The boom-bust cycle is the process of expansion and contraction in the economy that occurs repeatedly, hence it is called a cycle. The boom-bust cycle is a significant characteristic of the current capitalist economy.

Q: What can we gain by observing the boom-bust cycle?

A: We can understand the overall economic cycle more easily because the concept is the same. When the economic cycle is in a bust, the value of a country's currency will increase. Conversely, when it is in a boom, the value of a country's currency will decrease. Why? Boom is financed by loans, and most loans will use foreign exchange reserves. Yes, this is the structure of the global financial system.

Q: So, is it possible for me to achieve profits in forex trading just by accurately identifying the boom-bust cycle?

A: Yes, it is possible. The boom-bust cycle is indeed very powerful. High-impact events can become the spearhead that will move the money market.

Q: After understanding the boom-bust cycle, what is the next step for beginner traders to achieve profits in forex trading from news releases?

A: Pay attention to the data presented. This data is used to achieve the "big picture" of what phase is currently happening. The big picture refers to the economic attractiveness of a country to investors for capital investment.

From this big picture, we can better understand what is happening in the economic world. The economic attractiveness of a country to global capital is the key to knowing the value of a currency against other currencies.

So, we can identify who is likely to gain the most. Then, place our trades in sync with those who are moving the trend. From here alone, we can already make a profit, right?

Q: Sorry, I still don't understand. How can we know who is gaining the most?

A: It's not difficult. There are three types of market participants: speculators, investors, and hedgers. In situations where lending standards are quite loose and money flows are abundant, it means that speculators are taking over anyone involved in economic activities. As financial market participants, speculators are the main controllers of price trends.

When interest rates are at levels that match global economic conditions, then investors and non-speculative participants benefit. Therefore, by knowing who is moving the price trend, we can understand the natural nature of the cycle: whether it is dominated by monetary expansion or innovation and productivity increases.

However, we must also keep in mind that even in a healthy economy, the dynamics can still be used to create bubbles. A bubble is an economic cycle characterized by rapid asset price increases followed by contraction, especially if there is not enough interest from speculators.

Fundamental Analysis and Following Trend

Q: Alright, I understand. Next, how can I profit from that?

A: Yes, we just need to follow the trend. Even if our analysis does not confirm how the market moves, as long as we understand the background and reasons, we can be confident and take profits from there.

Q: So, fundamental analysis is just about following the trend, right? If so, why not just follow the price trend on the chart? So, there's no need to bother understanding the economy of the country and the like.

A: We can only follow the trend as long as fundamental factors allow it. Speculative activities tend to trigger bubbles, and a series of bubbles can sometimes occur very quickly and destructively.

However, bubbles only develop in environments that align with reasonable profit opportunities. Indeed, there is nothing wrong with participating. With fundamental analysis, we can avoid the negative impacts of speculation.

Q: Oh, I see. So, fundamental analysis is useful for leveraging long-term trends defined through the big picture, right?

A: Exactly. In fact, even without detailed fundamental reasons, one can easily avoid bubbles as soon as price movements indicate their symptoms.

Steps to Achieve Profit with Fundamental Analysis

Q: So, how do we build that big picture?

A: First, we can start by observing the interest rates of a country. Comprehensively assess the economic health of that country, see if the interest rates are appropriate or if there will be new adjustments. Then, relate it to the global scale and its political climate. This is just the beginning, you know. Once that’s done, we still need to observe economic data from the country that may not directly affect forex but is crucial for assessing its economic optimism.

Q: Next, how do we determine whether to buy or sell using fundamental analysis?

A: Now, if the above steps are manageable, then here’s the next step. To decide whether to buy or sell a currency in the market, we need to test the fundamental health of a country's economy by considering the economic indicators that are released regularly. Then, we evaluate the behavior of those data and relate it to market activity when similar data is released.

The point is, we need to first know which "actors" have the most power in the forex market. Then, whether the existing data supports the monetary policy or not. If this is understood, we will be able to assess the economic health of that country.

If it is healthy, then we can buy that country's currency. Conversely, if it is not, we can sell. If a country's economic policy is unreasonable, but the market is supportive, then it is best not to trade at all because it is too uncertain.

Q: Finally, is it possible for me to completely ignore market opinions and only rely on my fundamental analysis?

A: Yes, but it is best to first understand what causes bubbles. Wait until market opinions prove to be wrong, then we can enter the trade.

Fundamental analysis is always correct if we can understand it and are willing to be a little more patient because we have to consider when important economic data from a country is announced. If all of the above can be applied, achieving profits from fundamental analysis is no longer just a dream.

Well, with the conclusion of the fundamental Q&A as above, it can be summarized that fundamental analysis cannot be ignored in forex trading. Fundamental analysis has a complex but clear and directed reference. With this analysis alone, you can gain many things, from trend identification, market sentiment, to the big picture of a country's economic conditions.