Is Fundamental Analysis Fundamentally Useless-

Is Fundamental Analysis Fundamentally Useless

I know – it’s a loaded question!

But it’s one I have been thinking about a lot this week.

Is Fundamental Analysis any use for us forex traders?

After much deliberation, I have come to a conclusion.

(Drum roll please…)

The answer is Yes.

Yes Ladies and Gentlemen, you heard it here first!

For forex traders, Fundamental Analysis is fundamentally useless.

No doubt many will disagree with me on this. And that’s fine. Everyone has their own opinion, and their own reasons for it.

But I’m going to nail my colours to the mast.

I think that Fundamental Analysis is useless.

Here are 3 reasons why:

1 – We Can’t Predict The News

The Bank of Japan set its interest rate to negative last week.

Virtually none of the economists and analysts surveyed by Bloomberg called it in advance.

Even board members of the BOJ itself were shocked by the decision.

Now, if you listened to the talking heads on Bloomberg and CNBC, you would think that errors like this don’t happen often.

Surely analysts only get these things totally wrong on rare occasions.  Most of the time, they’ve got to be worth listening to, right?

Wrong.

It’s not rare.

Economists and analysts get things wrong all the time.

It’s not because they are stupid.

Some of these forecasters have teams of experts working for them. Really brainy people. They parse every syllable that comes from the mouths of central bankers. They crunch billions of data points.

All to get that slight edge, just to figure out what might happen next.

But they just can’t do it.

Can we retail forex traders, sitting by ourselves at home in front of our MT4 platforms, succeed where they fail?

Can we be right where the teams of number-crunchers are wrong?

Forgive me for being skeptical, but the answer has got to be resounding.

No.

2 - We Don’t Know How The Market Will React

Imagine you knew in advance what the next NFP print was going to be.

Or you knew in advance the couple of words in the interest rate statement that Janet or Mario were going to change.

If you had that information, what would you do with it?

You can’t just turn it into money. It’s not the same as knowing the lottery numbers in advance.

Because even if you know what the news is going to be, you can never know for sure what the reaction to that news is going to be.

Markets are littered with the dead bodies of traders who were waiting for price to “behave”.

Between mid-2012 and mid-2014, the Euro was facing almost daily reports of its inevitable and imminent demise.

It still rallied 2,000 pips over those 2 years, blowing up short traders left and right.

Look, I know that the Keynes quote is trotted out all the time.

But it’s important, because it’s true.

The BOJ surprised everyone last week with its move to negative rates. One week later, the Yen is stronger now than it was minutes after Kuroda opened his kimono.

We’ve become used to the Yen weakening when the BOJ eases. How could we have known that this time, this particular time, was going to be the one that was different?

It’s easy to describe how the market reacted to an event in the past. That’s what analysts do all the time.

Predicting how it is going to react in the future?

That’s not so easy.

For the majority of us, it’s impossible.

3 - Fundamental Analysis Can’t Even Get Its Own Name Right

So, to summarise so far - we’ve seen how we can't predict the news, and even if we could, we can't know how the market is going to react to that news.

It’s not sounding like a solid approach to trading the markets, is it?

But that’s not all.

I’ve saved the best for last.

Here's the biggest problem I have with Fundamental Analysis.

It can’t even get its own name right.

The word “fundamental” is defined as:

So, you would think that Fundamental Analysis, when it comes to markets, would be analysing the essentials, foundation or basis of what makes prices move.

Here’s what Wikipedia says Fundamental Analysis is:

That definition poses a problem.

(A word of warning here: if you are an economist or a financial analyst, look away now, because what I am about to say may explode your head.)

Good news doesn’t cause price to rise.

And bad news doesn’t cause price to fall.

The direction of price has got nothing to do with news.

The so-called “fundamentals” that fundamental analysts are analysing, are not the fundamentals that cause the market to move.

Here’s what causes prices to move:

Prices rise when there are more buyers than sellers.

And prices fall when there are more sellers than buyers.

So, the very term “Fundamental Analysis” is a misnomer.

Because it doesn’t analyse the true fundamentals of price direction.

Fundamental Analysis is someone’s opinion of something, which, in that person’s opinion, might move the market in a particular direction.

That someone is usually overpaid, has an intellectual superiority complex, and stands to lose nothing if they are wrong.

Do we need highly paid economist spoofers to tell us what buyers and sellers are doing?

No we don’t.

We can get that information from simply reading price action.

I Rest My Case

So, there you have it, Ladies and Gentlemen!

Fundamental Analysis is fundamentally useless.

I could go on, and offer more compelling reasons, but I’ll leave it there for now.

If you must read it, treat Fundamental Analysis like you would the celebrity pages in the newspaper.

Financial Gossip.

As useful as knowing the colour of Mario’s tie, or an analysis of Janet’s haircut.

Fundamental Analysis is an indulgence, a guilty pleasure, a distraction.

If you actually trade the markets, rather than just pass idle comment on them all day, I suggest you avoid it.

I welcome your comments...

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DISCLAIMER & COPYRIGHT

This update is based on my analysis on my charting package. It may differ to yours as it can be affected by time, market movements, charting packages and broker prices. I accept no liability for loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on any information in this report or analysis.