- What are fundamentals
- Price vs Value
- Fundamentals are the only way to derive an edge
Fundamentals: “A Central or primary rule or principle on which something is based.”
Looking at the fundamentals of nearly anything in life, will give you a better understanding of what something is composed of. For instance, builders need to understand the fundamentals of construction, an athlete needs to understand the fundamentals of their sport. If the builder doesn’t understand the most basic rules of construction, houses and buildings would not be sturdy. If a baseball player did not understand the primary rules of baseball, he would not understand which way is 1st, 2nd and 3rd! As a retail trader why would you not want to understand the primary rules of your trading business?
What are Fundamentals in Forex?
Forex Fundamental Analysis is analyzing pressing drivers of currencies at that time. Understanding where the markets “mind” is, will help the beginner trader understand what is driving a currency.
- Monetary Policy
- Capital Flows
- Political/Geo-political risk
The better you understand the primary rules of the Forex Market the better you will be able to value a currency instead of looking solely at its price. If we were to use Brexit for example, there have been many times in the last 3 years where its true value was not correctly representative in its price. By understanding what was going on inside with Brexit aligned with a strategy/process, you would have been able to exploit those moves and go where the pounds true value should be at that given time.
The only way we see shifts in the value of an asset is through understanding its fundamentals and its true drivers.
Price is where the current market is and value is where the asset price should be.
The most logical way to trade
In our humble opinion at Top Traders, Fundamental analysis is the most logical way to trade. It is hard to comprehend why a trader would not have a rationalization of what moves markets. Trading solely based on technical analysis will hinder you from reaching your potential in trading. In our day to day life, it's important to know the fundamentals of everything we do. Why would it be different when trading is involved? Large amounts of capital are at stake, why risk it when there is no clear understanding of the most basic aspects in the market.