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Pitfalls of the Fundamental Analysis in Forex

Fundamental analysis is widely used in trading for thousands years. In stock trading, fundamental analysis of the companies prevails over technical analysis in long-term investing. But in Forex, technical analysis is more popular because of the volatile and short-term nature of the foreign exchange market. Nevertheless, fundamental analysis has its fans, and many professionals use it to earn profit. What are the common pitfalls that can potentially wipe your trading account if you rely on fundamental analysis?

Relying on a news effect. You cannot rely on the specific news effect that will be caused on a currency pair. For instance, good news on the US economy do not always make the US dollar rise, while bad news do not always make it fall. Additionally, there might be a very high volatility period after such releases that would make all your fundamental assumptions fail. Although this is generally true for the fundamental indicators released in the USA, sometimes similar behavior can be observed with other currencies and countries.

Intraday fundamental trading. Intraday use of fundamental analysis is not something unique to Forex market. I know a lot of traders that are fond of day trading the news. Nevertheless, majority of them fail greatly, because fundamental analysis usually does not work that way. Fundamental indicators set long-term trends, while the short-term change they sometimes cause is volatile and unstable. Relying on it may lead to the big losses.

Confusing "good for currency" with "good for economy." More often than not, economic indicators that are good for the currency of the particular country might be perceived as hurting for its economy and vice versa. This happens because a weaker currency is often a boon the country's exporting companies, while a stronger currency usually hurts the trade balance and the manufacturing industry. So, it is useful to remember that not all good macroeconomic reports are good for the currency you buy.

I, personally, use fundamental analysis in my Forex trading, but I am aware of its possible problems. If you want to trade using fundamental analysis as your main method, then fine — just do not forget to be careful with this tool.

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