Fundamental analysis has been used by the traders and speculators to make profits by interpreting the economic developments. Throughout the ages, traders are acquiring great wealth by mastering their understanding of demand and supply in the forex market. Until the beginning of the 20th century, there was no concept of technical analysis. All the speculations were done on the basis of fundamental analysis. This type of analysis demands an in-depth knowledge and understanding of different components of economics. However, regardless of the way you apply to make profits, there is always a risk involved.
Fundamental analysis is basically a study of the reason behind the developments in the price of currency. In the short term, the underlying economic dynamics do not affect the market sentiments. The speculative enthusiasm of major short-term players in the forex market is never shattered by the trends in the economic activity. However, fundamental analysis is the best guide when with comes to long term investment as the speculations are dependent on the availability of money which is ultimately determined by the fundamental economic factors. For example, Any interest rate decision can immediately make the markets react in an uncertain way, but its actual effect is shown in the long term. All this comes under fundamental studies.
A fundamental analyst, who is a long-term investor, does not take market movements into account, but this is important while you are studying economics. Market developments can even affect the tempo of the government authorities as it could lead to a collapse of the economy along with the price of the currency.
Now the question arises, what is the way analysts use to perform his fundamental studies? Although there is no single approach that traders use, mostly the analysis is done by monitoring the short-term responses to fundamental data releases, and according to this data, the buy or sell signals are generated. You can also call it a form of technical trading as the short term value change due to any economic or political news release is dependent on the internal dynamics of the market. Suppose, a country’s unemployment number is increased by an increase in the currency value and the markets react to it. The trader will decide to buy that currency thinking that in the near future it will give favourable results. This is not purely a fundamental decision.
A trader who wants to trade on a short-term basis should go for technical analysis as there is no fundamental explanation for short term market ups and downs. Short term technical traders who ignore the fundamental approach always take a sensible decision. Fundamental analysis is always done on the basis of the economic activity. All the other statistical releases that make the market move have a very little predictive value for a fundamental analyzer.