Beginners in forex market often baffled by fast-paced price movements in a short time. Good fundamental economic news are supposed to make for bullish currency, doesn't it!? so why did prices turn bearish in the next day? How do we suppose to apply fundamental analysis, anyway? There are three rules to remember in applying fundamental analysis. Failure in understanding these rules might be the reason why your fundamental analysis does not work.
GBPUSD In M15 Timeframe At May 20th, 2014
Market Always Overreacts
In the course of your forex trading, have you ever seen price moves drastically from one direction to the other? Things like this often happen around fundamental news releases, especially US NFP. The market first react to first wave reports that said NFP rises by a few thousands. Wow! that's great! More people are working! But then the second wave reports are coming; wages stay flat, and unemployment rate doesn't change at all. The market instantly discards their initial assessment ('the good news' is actually bad!), and turn the other way.
The first thing that every trader should understand is that market always overreacts, therefore not all high impact news are game-changer. More than half of the events with three stars behind it are simply making sparks in the river while the current stays in the same course. To handle those sparks, you simply have to own a strong money management. What's important is understanding the strength of the flow and knowing how to row in the stream.
A Strong Data Does Not Equal Bullish, A Weak Data Does Not Equal Bearish
Now, here is where your ability to row in the stream will be challenged. At one time, you just know that USD is going strong because of this and that data are better than ever. However, you later found out that instead of going downward, GBPUSD hold out and then move upward! What happened? Well, guys and girls, it might be that GBP at that time is fundamentally stronger than USD. Therefore, USDJPY up, EURUSD down, AUDUSD down, but USD fell short against GBP. There are some other factors like USD long-term trend, but the first explanation usually covers it.
A strong currency does not mean that the currency will emerge as the overall champion in the forex market. Remember that currencies are traded in pairs within a globalized forex market, which mean: influential fundamentals come from both sides and more.
You should not only observe fundamental dynamics of one or two currencies, but also global market dynamics. Prices are determined by supply and demand in that market, so you should think about market sentiments too. What is the market concerned about now? Sometimes, it involves more than the common economic data releases. Geopolitical tensions in Ukraine, check, anti-China riots in Vietnam, check, and what else? If an issue influences stock, commodities, and or bonds, then it will most certainly influence forex market. Although the impact shall be limited, but when there are only a few high impact economic data releases in a week, those issues might come into play.
Fundamental Analysis Does Not Mean Forsaking Technicals
If you are unfamiliar with economics, at first glance it will seem that choosing to explore one approach shall be more prudent than trying to learn all of them. Therefore, beginners are frantically learning either fundamental analysis or technical, not both. If you have done this, then this is where you have made a grave mistake.
If price movements is a human, then fundamental analysis and technical analysis are his two feet. Learning one without the other is like trying to walk with only one foot. For a short time, you might be able to do that, but sooner or later, you will stumble and fall.
Fundamental analysis makes it possible for traders to understand the growing sentiment for a certain pair and where prices are going to go, but technical analysis will show traders the timing for a good entry and exit points. There are many other advantages of mastering the basics of both analysis. For instance, technical indicators could give an early warning when market sentiment changes or when the market has stretched tight (which means you should get out of there, quick!).
In short, it is good if someone tend to emphasize fundamental analysis on his trading, but it is also important to know and apply the basics of technical analysis. You won't be able to be a successful trader otherwise. As well, just dipping your hand into each analytics is futile; you should know how to navigate around properly using what you understand about them.