Fundamental Analysis Problems

The problem with fundamental analysis is that it is difficult to convert the input into a specific price prediction output. This is especially true if the information itself is qualitative -- such as Federal Reserve minutes. With FOREX leverage being what it is, it is seldom enough to know that a report is bullish for a currency without being able to attach specific values.

Interpretation is a matter of subjective perception by traders. It is not at all uncommon for a news release of fundamental information to be initially interpreted as bullish (or bearish) only to see the pairs of that currency plummet (or soar) minutes later.

Econometric analysis attempts to quantify the often-qualitative fundamental factors into a mathematical model.
These models can become enormously complex. The problems with econometric analysis are twofold: it is difficult to put hard numbers or construct a formula to describe the relationship between the fundamentals and FOREX prices. The interactions and specific weights of each factor are constantly in flux and the relationships between them are almost certainly nonlinear. Relationships that hold today are invalid tomorrow.
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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