Why Use Fundamental Analysis?
I’ve always been into economics and global macro politics, it’s something I’ve just always “got”.
My trouble was never actually being able to trade technically, I struggled to look at a chart and find sensible entries.
So it’s funny when I’m teaching people how to use fundamentals that I often get asked the same question, why do we bother with fundamentals.
This got me thinking and I’ve decided to do a couple of articles about why I use fundamental analysis in my trading and why you should also.
The first objection I am going to tackle is, “Applying fundamental analysis is unnecessary because you only need to look at a chart”.
This particular objection often comes from those people who think fundamental analysis or reading sentiment is too complicated.
They feel that they can look at a chart with various lines or indicators on and know exactly where to trade, for example, a trend line break or flag pattern et cetera. I’m going to use a car analogy to explain why I believe this is wrong.
Okay, so think of trading as driving a car. If you are only using technical analysis you are only using part of the tools available to you. Let’s say you were trying to drive a car but only using the rearview mirror. You may be able to get to where you want to get to if it’s a simple journey but anything more complicated and you would probably end up wrapped around a lamp post or similar! In fact you would never even consider the idea of trying it, I’d like to think?
Why Use Fundamental Analysis
Now let’s say that using fundamentals is a bit like allowing you to look through the front windscreen, and just because I like to spoil you, you can use your mirrors also. Now you have a much better picture of the environment around you, you can see any risks, any concerns and you can read what is likely to happen in front of you.
Trading fundamental analysis is essentially the same, you still use your technical analysis, you can even continue to use your indicators and squiggly lines, but fundamentals gives you a better understanding of where price is likely to go and why. Think of fundamentals as another confluence that you imagine being on the chart. For example, you have a bearish breakout on a Euro pair, but you know that the ECB is likely to increase interest rates next month (yes this is completely imaginary), interest rate increases is positive for a currency so why would you take a short?
In fact, over time, applied in the right way you might find yourself using less of those squiggly lines when it comes to making a decision on which direction to trade a pair. Often this leads to making less trades, but trading is about making money, and every trade you take there is a risk of loss. Therefore the less trades you take the better because you have less risk, the key thing is to pick the right trades and that’s what fundamentals helps you do.
You also need to remember that indicators and squiggly lines generally tell you historically what has happened with price and gives you no indication as to where it’s heading. So why would you base a trade based solely on 2 lines crossing that relate to some time in the past? No, I don’t know either :-).
There is one other point I will make about fundamental analysis, and that’s about the tools that professional traders use. If you ever go to a trading company you will see Bloomberg terminals, they generally are the professional standard in trading. They are all about providing fundamental data to traders for them to be able to make informed decisions. These terminals cost around $2000 per month and there is a minimum contract of at least a year if not longer!
No company is going to pay for such a resource unless there is a genuine need for it. The fact that these institutional trading tools are so expensive suggests that they provide something that helps them make money, fundamental information! They are paying huge sums of money to get this information as quickly as possible because it makes a difference to their trading.
So, hopefully, that’s given you some food for thought, I will be back in a couple of days with another objection.
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Why Use Fundamental Analysis