Fundamental Analysis: The Good and The Bad News

Learn the basic of fundamental analysis, how to be one step ahead against other traders and how to piece up all the seemingly jumbled up economic information for your advantage.





Let's start with the good news; everyone can learn fundamental analysis. After all, fundamentals are what actually move the price. In that regard, it is beneficial for any trader to gain insight at how this approach affects Forex trading.

Now, the bad news; fundamental analysis can also mislead you. Especially when you blindly follow a shortcut without piecing together the "bigger picture". Unlike technical analysis, there's no instant formula to enter or exit market with macroeconomic report or data release.


So, How Should You Approach Fundamental Analysis?

Let's think it this way, fundamental analysis is just like weather forecast with half-drunken weatherman. A day before, he said the weather is going to be sunny all day, so you plan ahead to make picnic. But, when you step out from your house, the heavy clouds greets you, instead. To your dismay, the weatherman revised his forecast later.

fundamental analysis forecastHint: the weatherman drank too much kool-aid

Yes, fundamental analysis are subjective, and without proper knowledge, it will mislead you. In order to benefit from fundamental analysis you need to figure out the "big picture" first.


What On Earth is that "Big Picture" Thingy?

A specific economic report (like NFP or GDP) is only a single piece of a jigsaw puzzle. When they are pieced together, only by then you can get insight of the "Big Picture".

fundamental analysis, jigsaw puzzlejigsaw pieces that makes up the big picture

Conversely, if you only narrow down on a single piece while ignoring the other pieces, you are prone to be mislead. That's why you can't only rely on a single so-called "high-impact" data release all the time without considering other economic data release.

Here's an actual example of it:

fundamental analysis, chart

Let's say someone told you to stick only to US NFP (Non-Farm Payrolls) because it contribute about 80% of Gross Domestic Product. That statement alone makes US NFP to hold high "impact" during its release. Therefore, most of the time, whenever it is released higher than expected value, a rise in US dollar exchange rate is imminent.

However, in real fundamental analysis, you cannot expect the same result for 100% certainty. One such case was what happened on 15th January 2017. During that date, US NFP was released way below the expected score. Your logic would state that greenback (US dollar) should suffer from it, but that's not the case anymore. Instead, it rose to new highs for days ahead.

So, how did that happen? What caused it? The answer was the other piece, namely Average Hourly Earnings. It may be overlooked for most of the time it was released with NFP, but at that particular time it packed a bigger punch. The huge rose from -0.1% to 0.4% for hourly earning took more investors' interest to keep buying US dollars even though NFP plummeted.

NFP report, economic calendarNon-Farm Payrolls is always released a month later.

So, then again, how do you piece all the information and piece it together as one big, insightful picture?


The Quest of Fundamental Analysis: Revealing the Big Picture

Here's one tip for you: perseverance is the key to success. You'll need perseverance to actually benefit from fundamental analysis. That is especially true, because at some occasions you the market will surprise you. Heck, even professional cannot guarantee 100% success rate even though they take their daily dose of fundamentals regularly.

Let's start with the frameworks.

Fundamental analysis is basically intrinsic value assessment of any given asset. In your daily language, it's the process of giving a mental value of a certain thing; like how much does this basket of egg should cost you, etc.

But it also goes more than that. What makes fundamental analysis great is the fact that avid trader use it to gauge a "potential" value of assets. If ordinary peasants value things based on their current state, fundamentalist does it even better; they predict what that same thing will value in the future. Here's an example:

  • Mark is a seasoned trader and he also manages a local granary that stores farmer's crops.
  • Jason is a local wheat farmer.

One day Jason and his co-farmers managed to over-produce wheat stacks, therefore the supply was overabundant, so the price dropped from the all-season average. Then came Mark, Jason usual customer. Jason had expected Mark to purchase at the same exact budget but with more loads as the price per metric ton drops. But to Jason surprise, Mark offered ten fold of his usual budget.

"Hey fellas, what makes you so bulked-up lately, no pun intended, thou," said Jason to Mark. But Mark only replied with a smirk and opened up his wallet, sealing the deal.

Marks knew something that Jason didn't, the locust swarms attack loomed over. In case you didn't follow, the bulks of wheat Marks purchased from Jason reaped him huge profit. Due to locust attacks, Jason and all other farmers cannot produce wheat stacks anymore for months later. That caused the wheat price to skyrocket as there was more demand than supply. It's only natural to traders like Marks to resell his stock when the price jumps much higher than its original price.

The example above is the core activity of fundamental analysis. It lies at how Marks got better informed than Jason. In real Forex trading environment that's how each trader uses macroeconomic tidbits to get ahead of other traders.