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Fundamental news events occur all day long. Traders need to watch out for economic reports, company earnings releases, central bank statements, political developments and a whole a lot more.

However, having access to the data and the news events are of no particular use to a trader if they do not know how to analyse that information correctly and come up with solid buy and sell decisions based on that analysis.

A Guest Post By  FXTM

Bad examples

One of the worst things a trader can do is to think that a fundamental news report or economic data release has more importance that it actually does. Sure, economic reports are important, but they don’t always have an effect on markets the way you’d expect.

For example, just because US retail sales are 0.1% higher this month does not necessarily mean that forex markets will react and price in a stronger dollar. The fact of the matter is that forex markets are extremely good price discovery mechanisms and some news flow will either be already priced in or of little consequence to the overall flows that affect markets.

Supply and demand

Because of this, it’s easier to see that supply and demand is the number one thing that drives forex markets. It is participants that move markets, not news releases or economic reports. In other words, if the US dollar goes down, it’s because more traders are selling it than buying it and if the US goes up, it’s because the currency is in more demand and less supply.

Another thing that traders need to watch out for when dealing with fundamental analysis is to make sure they stick to their decisions. As mentioned, news items do not always move markets like expected, particularly when accounting for less important items. The trick, however, is to stick to your guns. If you have done enough, rigorous research on the matter and that research suggests that your fundamental views are in favor of one side of the market then you must stick to those convictions and trade in step with your research.

If you choose to ignore that research or change your mind then you will have to ignore fundamental analysis completely and instead focus on price action.

Short term mentality

The truth is that while fundamentals, particularly supply and demand, are the ultimate drivers of forex markets, they rarely have any impact on markets in the short term. If trading on the short term, traders may well be better advised to create models focussed around price and technical conditions. Fundamental analysis could be better suited to provide filters, such as limiting your trade choices to just one side of the market, long or short.

Further reading:  4 Hazards for forex traders