June 16, 2021 | by sandeep
Breaking Down Fundamental and Sentiment Analysis
It’s the Economy, Stupid (or An Intro to Fundamental Analysis)
Fundamental analysis never studies price charts.
It doesn’t care about indicators or even bothers looking at them to predict what’s going to happen in the future based on what transpired in the past.
Fundamental Analysis focuses on macroeconomics, central banking policy, the current political environment, upcoming elections and many other factors that could affect the price of the asset in question.
For example, if we’re analyzing USDJPY, it would be important for a fundamental analyst to know what the Bank of Japan is planning on doing to help the economy and also what’s going on in the American economy.
Under this approach, the economic and political data being analyzed includes unemployment, inflation, retail sales, the balance of trade between countries, GDP, all things that could affect the demand and supply of that country’s currency.
So the next time one of these prominent members of the economic world, say, a Central Banker, makes a statement on the country’s monetary policy, you may want to closely compare what is being said to what was said last time around.
Who are these elderly people in the image? They’re pop stars (kind of) if you are in the world of Forex.
These are the people you should follow quite closely and compare and contrast their announcements over time. Next time they issue a press release, you should try to gauge whether or not the pertinent central bank’s policy is changing.
If you use fundamental analysis, it’s important to always have an economic calendar readily available, somewhere that tells you the time and date of the different economic announcements.
By following this economic information, you are looking to understand the economic environment well enough to have a good overall idea of the health of that economy.
So why doesn’t everyone just follow this methodology? It sounds far more grounded than technical analysis, no?
The reason for this is that fundamental analysis doesn’t actually provide you with a specific entry or exit point for your trades, therefore making relying on it a little bit risky.
The timing of the trade can be quite dangerous. It’s difficult to convert this economic knowledge into a specific time to buy or sell when you’re trading, so there is a little bit of a weakness there in the fundamental analysis. Despite there being a lot of economic information out there, it’s quite rare to find all economists agreeing on a given policy.
Generally speaking, fundamental analysis allows you to have a better overall understanding of why a price moves.
For instance, a few years ago, there was a big hurricane in the Gulf of Mexico. Oil refineries had to temporarily shut down for a few days for safety reasons. Obviously, oil tankers were redirected and they couldn’t deliver oil to the refineries.
When oil inventories came out, the figure was very low. When that figure was released, the price of oil shot up. Traders bought oil due to the low oil inventory report, which suggested that the supply of oil was down and therefore prices would rise.
The move up did not last very long, however, because inventories were low as a result of the oil tankers simply not being able to deliver the oil on time and the refineries temporarily shutting down.
So once the hurricane passed, the oil would be delivered and the inventory figures would go back up again. No reason for the price to jump up.
So fundamental analysis can give clarity to your trading, which you won’t always be able to see just by looking at a chart.
The Market’s Feelings Matter (or An Intro to Sentiment Analysis)
Sentiment Analysis is based on the idea that every trader has his or her own opinion as to why the market is doing what it’s doing.
Remember: The market is made up of a lot of traders just like you and me.
You all have the same information but you do not always make the same decisions based on that information because you feel differently about it.
Sentiment analysis tries to calculate the overall sentiment of the market regardless of what the political and economic conditions or chart patterns are suggesting. You’re looking at the overall market sentiment at any particular point in time and you’re trading with that in mind.
Remember: You cannot move the market; you’re not even a drop in the ocean. You can’t swim against the current, even if you want to.
As a trader, you need to establish if the market is bullish or bearish.
The market may well be bearish for days and days on end, but it could be bullish within those days for a couple of hours here and there.
So sentiment analysis will overlap a bit with technical and fundamental analysis.
You can use technical and sentiment analysis before you open trade, using both to guide your entry and exit.
However, the overall decision you take going into a trade, whether bull or bear, is made by using fundamental analysis, where central banking policy drives bullish or bearish attitudes. Additionally, central banking policy doesn’t tend to change very often and therefore will very rarely change what your bias is on a particular currency.
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*Any opinions, news, research, analyses, prices or other information contained here are provided as general market commentary and do not constitute investment advice. FXPRIMUS does not accept liability for any loss or damage, including without limitation to, any loss of proﬁt, which may arise directly or indirectly from the use of or reliance on such information.