According to Warren Buffet, fundamental analysis is the Holy Grail of investors. He claimed to have amassed his fortune using it. People who revere him vouch for the effectiveness of this approach. The media has also been singing its praises.
In reality, most Forex traders do not follow fundamental analysis. Even though many of them agree with this opinion, we are not talking about self-proclaimed experts here. However, the general public might not consider them ” qualified enough, ” so their opinion is unlikely to be as significant.
This article aims to explain why fundamental analysis does not work in Forex markets.
Infinite Factors
There are only a few economies that have financial markets. For example, the FTSE gained much value from economic developments within Great Britain’s borders. Forex, on the other hand, is an international market. It is affected by economic and political developments across the globe! Therefore, there are infinite factors involved.
To list down all the factors affecting the Forex market is simply impossible, let alone tracking them and making decisions based on them. In the long run, fundamental analysis provides little to no benefit to forex traders because it is extremely time-consuming and time-consuming.
Inaccurate data
Traders make decisions based on information released by countries. They pay attention to unemployment data, inflation figures, productivity figures, and so on. Unfortunately, countries only release this information three to six months after it is released.
As a result, traders can’t make decisions based on this data in real-time, so by the time it reaches the market, it is already outdated, so if decisions are made on obsolete data, they will result in losses.
Manipulated Data
The data regarding unemployment, inflation, etc., determines whether politicians gain or lose their jobs. The Chinese government, for example, has been notorious for manipulating its data to get foreign investments. As a result, they have a strong vested interest in making it seem like they are doing a good job.
Forex markets have auditors to ensure that the public is given accurate data. However, there are no such requirements for Forex markets, so data manipulation occurs. Furthermore, there is a lot of inconsistency regarding how these numbers are calculated across different countries. Simply put, fundamental analysis based on fundamentally wrong data is bad.
Market Always Overreacts
The Forex market always reacts quickly and overreacts, and currencies that could have been considered undervalued if the fundamental analysis was somehow able to support it suddenly shoot to the top. The Forex market runs in a spiral of greed and fear.
A currency’s fundamental value is merely a bookish number, as the market reacts fiercely when the currency is overvalued or undervalued. It is not like the currency’s value will settle at that number at some point in the future. Furthermore, currencies’ fundamentals are constantly changing.
In contrast to companies, countries are not static regarding their fundamentals. Since the market may never really settle at what fundamental analysts call the “equilibrium point” for your trades, using a theoretical number as the basis may not be the best idea.
Timing Not Revealed
Let’s take a moment to think about what it would take to decipher the complex code of the Forex market. As a result of your research, you concluded that the Euro is overpriced compared to the dollar. Consequently, the Euro should fall in value against the dollar to correct itself. However, the key question is when this decline will occur. Nobody knows when it will happen.
As a general rule of thumb, fundamental analysis will show overpriced or underpriced currencies. However, the majority of Forex bets are made with leverage. Leveraged trades have an expiry date and cannot be held for decades.
Bottom Line
In other words, you will lose money even if you place a fundamentally correct wager at the wrong time due to interest charges and accumulated mark-to-market losses. You will likely have to unwind your position and book losses when interest charges and mark-to-market losses accumulate. Conversely, if one simply avoided leverage so that holding the bets for “decades” became an option, the percentage gains and losses would be so small that conducting a fundamental analysis would be meaningless.
