Did you know that fundamental analysis can be bad for day traders? Here are the reasons why you should stop using fundamental analysis in day trading.

Day trading is one of the most popular trading methods in the forex market. The purpose is to make as many profits as possible from small price movements within a trading day. Therefore, this method is suitable for traders who have enough time throughout the day to monitor and analyze the market for the best possible outcome.

Fundamental analysis in day trading

Like any other strategy, day trading also needs a distinctive approach to analysis. This refers to the method of how you analyze the market and how it affects the decisions that you make with your trades. Essentially, there are two types of approaches that you can choose: technical analysis and fundamental analysis.

 

Technical Analysis Vs Fundamental Analysis

First of all, we need to understand the basic definition of each concept. Technical analysis refers to an analysis method that is based on market statistics. This includes the use of chart patterns, trends, support and resistance levels, volume data, and so on.

The goal is to predict how the market might act in the future based on the patterns found in the past market behavior. Technical traders believe that the market's future performance can be determined by analyzing the past performance data.

On the other hand, fundamental analysis uses the fundamental aspects of the market, such as economic data and news headlines that could affect the price of a specific asset. Put it simply, fundamental traders need a good understanding of macroeconomics and geopolitics.

The two approaches are different in terms of the way it determines the value of an asset. Technical analysis is better for short-term trading mainly because it can produce results quickly. There are even technical indicators that could automate the process and save more time. It allows them to make profit from short-term movements and perhaps find multiple trading opportunities within a single day.

Sometimes, technical analysis can also be used in medium to long-term trading strategies, but it's best to combine it with fundamental analysis as well. Unfortunately, the same condition does not apply to fundamental analysis because fundamental analysis cannot be used in short-term trading strategies like day trading. Why is that?

 

It Is Irrelevant To Short-Term Trading

Fundamental analysis uses a bigger scope of data and a longer period of analysis, so it produces a rather holistic view of the asset's future. This is particularly useful for long-term traders because it can help them determine whether the asset is worth investing in for the long term or not.

Meanwhile, such information has little to no value for day traders. In day trading, fundamental aspects like GDP or inflation numbers don't matter much because they don't directly impact the short-term price movements.

So, as a day trader, there's no need to learn about that information simply because it is irrelevant to your trades. There's even a high chance that knowing those data will affect your mental and prevent you from making money. Instead, use technical analysis and technical indicators to help you analyze the market condition and find small trading opportunities throughout the day.

 

It Could be Distracting

As explained above, fundamental aspects are not relevant to short-term price movements. So, if you consider this in your analysis, you might end up focusing on the wrong side of the market. Remember that the only piece of information that matters for day trading is the price chart of the asset. Thus, you need to pay attention to the actual price actions and make a conclusion from there.

It is worth mentioning that technical analysis requires you to stick to your trading plan. Once you build a good trading plan, you need to execute it and see if it could reach your expected outcome. This is why you need to make a good analysis of the market based on the repeating price movements and chart patterns that occur every day. If you could master this, then you would certainly perform well as a day trader.

 

It Presents Less Trading Opportunity

There's not a lot of fundamental data that could be analyzed daily. For instance, if you look at the calendar, some economic indicators are released every month or even quarter. Such information might be useful to predict where the price would be in the next 5 or 10 years, but it won't tell you how the price would change on the following day.

For instance, based on the fundamental data, you might find that many people are buying a certain stock for their retirement accounts because they believe that in the long run, the price will rise significantly. That does not mean you should invest and trade it today, though, because a lot of zigzagging could happen in the meantime.

Meanwhile, short-term charts show the real condition of the market at that very moment. This is what matters to a day trader. By analyzing the chart, traders would be able to find more trading opportunities and get a higher potential profit.

 

The Market's Response Is Not Always Predictable

Some day traders think that knowing the fundamentals is necessary to predict how the market would react to certain announcements or news releases. However, this is not always the case because oftentimes, the market could react in the most unpredictable way or the complete opposite of what people normally expect. It might even seem random at some point.

For example, after looking at a better-than-expected manufacturing index, you decide to buy US Dollar in hope of price surging up due to the optimistic outlook on the economy. But it turns out that the price goes lower than before because people were focusing on a bigger fundamental catalyst. This is what makes it dangerous for day traders to think that they can predict what the market would do based on a piece of fundamental information.

 

Should Day Traders Ignore Fundamental Aspects Completely?

The answer is not exactly, because there is actually one specific time or condition where fundamental data might be useful for day traders. Although day trading doesn't require you to stay updated with every single news related to the asset, it is important to know when high-impact economic reports are released.

The actual numbers in the reports don't actually matter much, but one must be aware that this fundamental news could cause big swings in the price chart because this is the time when both short-term and long-term traders make their moves. Therefore, you need to be prepared for such swings to happen and adjust your trades accordingly.

In order to find out when these crucial times occur, you could refer to economic calendars. To avoid getting significant loss, it is recommended to close all of your positions about three minutes after a news release, or maybe even longer if the impact is so huge. It is more profitable for day traders to trade on regular trading days because huge news releases could mess up your trading plan and make you lose money.

 

Final Thoughts

Fundamental analysis is a trading method that is more suitable for medium and long-term traders in many ways. Fundamental data doesn't change on a daily basis, so it doesn't necessarily impact short-term price movements. This is why fundamentals are mostly irrelevant for day traders who trade almost every single day.

If you know too much about fundamentals, it might distract you because you might start considering the long-term impacts instead of focusing on the short-term activities. Day trading requires good chart reading, a strong trading strategy, and quick responses to price changes, not a careful analysis of news releases.

 

At the end of the day, knowing a little fundamental might be helpful in day trading, but too much of it can slow you down. Day traders would perform better during regular trading days, so try to avoid trading when there's huge economic news. Just focus on the chart and stick to the trading plan.