For the ever-growing number of traders learning technical analysis, ‘fundamentals’ can sometimes seem like a dirty word.
However, it doesn’t have to be. In fact, fundamental analysis can complement the work we do with our technicals.
One of the main reasons new traders avoid fundamental analysis is the perceived time and effort involved.
“Urgh who wants to spend time reading stuff when all we need to do is draw a few significant levels on our charts?!”
Well, if you’re not putting enough effort into your analysis so far, it’s time to get started because that’s the difference between a great trader and a mediocre trader!
The Minimum: Fundamentals as a Negative Filter
Let’s start with the minimum level of fundamental analysis I’d expect from a trader: using it as a negative filter. You can use this as your starting point.
When we talk about fundamental analysis, most traders will see it as a method of finding trade opportunities. While this can definitely be the case, it isn’t the only way to use it.
Instead, by using fundamental analysis as a negative filter, we’re using it to help us avoid potentially dangerous situations or at least reduce our risk. This means, rather than spotting opportunities to enter a trade, it’s helping us do the opposite.
You may already be doing something similar with the use of your economic calendar. For example, if there is a major news release that’s potentially going to disrupt one particular market, we can filter that market out at that specific time.
That’s the easy option… but what about the times when there are economic events that aren’t scheduled?
Being Aware of Unscheduled Economic Events
This means, we have to rely on our fundamental analysis and understanding of the current economic and political landscape so we can avoid markets or reduce our risk when appropriate.
For example, there have been thirteen trade negotiations between China and the US to date. These will often cause herd activity in the US dollar, which can make the conditions very unpredictable. These negotiations won’t always appear in the economic calendar. Therefore, unless you’re following the financial news and analysing the situation, you probably wouldn’t even know it was happening.
…That is, until you try to find out why the market suddenly spiked through your stop loss!
By following the news, you will also get a better sense of the expected impact of a particular event.
Recently we had the Brexit negotiations, which commenced in August. Although at least one of them was shown in the economic calendar, how would we know whether this one will have a more significant impact compared to the previous ones?
This can be the difference between just reducing your risk or avoiding a specific market altogether.
Of course, fundamental analysis can get very complex. If you’re relying mainly on technical analysis it isn’t necessary to become a full-blown fundamentals expert.
However, if we start with the basics, over time you’ll inevitably get a deeper understanding. At first, you may not know what news, data or research is important to read and analyse, but over time you will get better at separating what’s useful from what’s not and be able to put things into perspective.
If you mainly trade highly liquid assets, such as the major currencies, indices and commodities, you will mostly be focusing on the macroeconomic situation of the relevant economies.
If there are any events you spot that could put you in a risky situation, add them to your calendar, so you don’t forget about them. Even if you aren’t able to form your own opinion about the situation, you can at least be aware of what’s taking place.
Once you become more familiar with what’s going on and you’re ready to take your fundamental analysis to the next level, spend some time putting together your own report on the global picture.
Keep a contents page and categorise it into sections based on market type or country. Then spend some time each week updating it based on new data or information that comes out. Think about what developments may change your market view.
It takes time, but it’s effective! You can then flick through the document whenever you need a refresher on the overall state of the economy and how everything ties together.
In an upcoming article, we’ll provide a list of useful resources to get you on track. Until then, flip open that Financial Times and get reading!
By Harley Heavens
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