Fundamental analysis can be important for day trading forex, although traders often give a lot of emphasis on technical analysis. However, incorporating fundamental analysis can provide additional insights and context. Here are some reasons why fundamental analysis is relevant for day trading in the forex market:
Trading in line with sentiment
Trading in line with sentiment may seem complicated to technical traders. But when you finally understand that trading in line with sentiment gives you the direction in which you have a higher probability in the trader and becomes easier to apply your technical patterns everything becomes easier.
Learn How you can trade in line with sentiment by reading our article on that topic.
Technicals shows you only the past. Fundamentals, if read correctly will give you an insight on the future
Understanding Currency relationships
When you dive deep in fundamentals you will start understanding the relationships currencies have. For example, Aussie dollar is closely tied to commodities and China. The Canadian dollar has a close relationship with Oil because of their Oil production and imports/exports of Oil.
Also the Risk on Risk off strategy gives you a pretty accurate direction in which one currency will move if the other is going higher or lower.
Read about Risk On Risk Off in detail and understand how it works.
If you understand the relationships between currencies and know when a respective currency will trade higher or lower, you can then use your technical patterns in an easier manner to determine your risk and execute your trades with more confidence.
Volatility awareness and global economic events
Volatility around economic events increases and you don’t want to get caught on the wrong side of it. Trading in line with sentiment and with macro bias doesn’t mean you want to trade the actual news releases. It means that you want to use that news release as an anchor and direction in which the currency will move in the near future.
For example, if inflation in the US builds more than expected we will have inflows in US dollars, that will result with Us Dollar trading higher after the release. Your job is to jump on the back of that news release.
Risk management
Risk should be at the fore front of everything you do in trading. And when you understand fundamentals and when volatility is high you can manage your risk accoridngly if you are in an open position or you want to enter a trade.
Understanding WHY currencies move is one of the most helpful things to know in trading. Do not get me wrong, technicals are important too, but fundamentals can get you to the top 1% in trading.
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