Introduction to Fundamental Analysis
Fundamental analysis is a broad term describing the trading act based solely on global aspects that influence currency, commodity, and equity supply and demand. Many traders will use both basic and technical methods to determine when and where to place trades, but they will also favor each other. If you want to use only fundamental analysis, though, there are a variety of sources to base your opinion on. Keep in mind fundamental analyzes can only suggest where an asset might go; they don’t give you all the information you need to make a forex trade. To determine when to enter, set your risk and manage your trade, you must rely on charts and price action. The use of price charts falls within the technical analytics arena
It can be a very tenuous and unpredictable challenge to trade in economic releases. Many of the biggest minds at the world’s major investment banks are having a hard time predicting what an economic release will eventually end up being. They have models that take into consideration many different aspects but can still be embarrassingly wrong in their predictions, which is why markets move so violently after important economic releases.
Many investors tend to go with the “forcast” of those experts, and typically markets will move in the direction of the consensus prediction before the release. If the consensus fails to predict the final result, the market then usually moves in the direction of the actual result – meaning that if it was better than consensus, a positive reaction unfolds and vice versa for a less-than-consensus result. The trick to trading the fundamental aspect of economic releases is to determine when you want to make your commitment. Do you trade before or after the figure is released?
Both have merits and detractions for themselves. If you trade before the release, you can try to leverage the flow toward the expectation of consensus. Nonetheless, other fundamental events around the world can have more impact on the market than reading the consensus. Trading moments before the economic release means you have an opinion as to whether the actual release is going to be better or worse than the consensus, but you could be terribly wrong and risk major losses on a coin flip. Trading moments after the economic release means you ‘re going to try to establish a position in a low-volume market that is challenging to get your desired price.
Some countries around the world don’t get along very nicely with each other, or the global community and conflicts or wars are sometimes imminent. These tensions or conflicts can harm tradable goods by changing the supply or even the demand for specific products. For instance, increased friction in the Middle East can put a strain on the supply of oil, which then makes the price rise. Conversely, a relative calm in that part of the world can decrease the price of oil as supply isn’t threatened. Being able to predict how these events will conclude accurately may be a way to get ahead of the market with your fundamental perspective.
Some fundamental factors are more long-lasting, while others are more immediate, but trading them can be both challenging and rewarding for those who have the intestinal fortitude to trade them. Also, the fundamental factors listed above are just the start of a list that is much longer as new economic events and news are created every day. So keep your eyes open for new situations that arise, and maybe you could be fundamentally ahead of the curve!
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