There are 2 basic types of FOREX fundamental analysis topics:

FOREX Fundamental Analysis Topics

• News, such as an NFP release.
• Long term economic conditions.

Both long and short term retail traders must simply ignore the news.

News is just chatter, and though it may immediately affect price, its consequences are most likely to simply return price to whatever it was doing before that news was recognized.

Of note is that to this post, I have a companion video of the same title: Correct Use Of Fundamental Analysis In FOREX Trading that puts all of this together from a different view point.

If you've come from watching that video, then press on here. However, if this is your starting point, I might suggest that you read through this before watching the video. Or, if you want, you can skip to the bottom of this post to watch that video now.

As far as news itself is concerned, it only becomes significant when a series of news events are correlated, and indicate a consistent catalyst to some economic condition that may thus cause changes to future price action.

As to doing fundamental analysis on long term economic conditions, my position is that this is a pointless exercise. To try to think that we, as retail traders, could compete with hundreds, if not thousands, of PhDs working 24/7 studying this material is ludicrous at best.

That’s not to say either of these types of fundamental analysis topics can be ignored. Rather, they each need to be considered within the scope of what we as retail traders do have the capacity for. In addition, this analysis should be used correctly within the context of the trade process.

These are important thoughts for retail traders of any time frame view, so I suggest a serious review of both the video as well as this blog post. You should, of course, do so bearing in mind that these are all my thoughts on how I view all of this rather than advice on how you might approach the issues.

A series of correlated economic events represent incremental changes to the underlying economy of a country. Because there are 2 pair countries in a currency pair, this requires some fairly complex comparative analysis of the interrelationship of the economic events in one country with corresponding events in the other.

A daunting task at best. So, what can we do?

Well, what's the real problem here? Isn't it the time required to identify these long term economic events, correlate them, and then determine a trading response to them? That sounds quite plausible, but the question remains: what can we do about that time?

Well, first of all: the long term trader has the time for that sort of analysis, whereas the short term trader does not. Well, that's fine, and thus fundamental analysis should then form an integral part of the long term trader's view of the market. Again, however, the success of such pursuit will be damped by the need to compete with "The Big Boys", the large institutional trading organizations.

I specifically chose short term trading over long term for precisely that reason: I know I can't compete with that overwhelming advantage as to ferreting out the true economic conditions from what the news is belching out, and so I refuse to play that game.

That doesn't mean I ignore the analysis of long term economic conditions. I do use this information, but I use it differently, and at a different time than perhaps others do.

I do not study economic conditions to use for trade entry analysis, but rather I gain a feeling for the overall effect of current economic conditions for trade risk management. In this way, I'm not anticipating price action being caused by economic events, but rather reacting to it in real time. It's soooo much easier that way.

This isn't to say that I'm always successful at this process. Far from it. My — as in my — failures to utilize this knowledge has always been at the cost of having too strong of a price directional bias based on current price action.

I currently do not have a rule to counteract this as I've only recently within the last couple of months discovered this disconnect in my trading. And, as all trading discoveries are made, it came about because of failure, and the loss of a lot of money. I lost 16% of my at-risk bank. That was my wake up call.

I'm not sure a long term trader would be encumbered by the series of misjudgments that I made as a short term day trader.

I say that because the event that created the catalyst for my realization was a failure to understand the dependencies among 3 pieces of information used primarily by short term traders, and correlating them with current price action as a function of fundamental activity action at that time.

The elements I'm referring to are: the long term economic conditions in the 2 pair countries, the long term trend bias, coupled with fading that long term trend with an opposite short term trend trade.

Each of those elements, or factors, needs a different probability priority weighting, and all of this analysis must not be influenced by personal short term trend bias analysis.

Prior to my realization of how these dependencies should be correlated with the actual underlying economic conditions that is driving current price action, I was mostly successful with my utilization of multiple time frame analysis.

I say 'mostly' because in looking back in hindsight, I can now see how my largest losses occurred.

I discovered that what was happening was my failure to update my view of current price action as a function of the contrary time frame I was trading on with that of those current economic conditions.

Moral of the story....

Though news and economic events may only intermittently become counter to current price, when your trading time horizon is down on the 15 minute and below levels, these anomalies become far more enhanced than they might be on a higher time frame.

Thus, a review of economic conditions as a function of current price action from a fundamental standpoint becomes one of risk management rather than one of trade entry analysis.

Video: Correct Use Of Fundamental Analysis In FOREX Trading