When doing fundamental analysis, a trader studies the overall state of the economy, concentrating mainly on elements closely related to his trade. The research focuses on financial events including those that are remotely related but yet could affect the trade. Political, social and general events can all have a significant influence on the markets.
This type of analysis is for traders who wish to dig deeper into the financial world. In general, It takes a little more time to understand than technical analysis but should have a positive outcomes if done properly. What stands behind any type of analysis is the wish to avoid surprises that might jeopardize the trader’s money. Therefore, the deeper the research and analysis, the lower the chances to be taken by surprise. Some of the world’s top traders, who regularly appear on top rich lists employ fundamental analysis. This is definitely a good track to follow.
We must emphasize that even when conducting thorough fundamental analysis, there is no guarantee the trade will be successful. The nature of trading any instrument is its relationship to external factors that can impact it, and the fact that the market can dramatically change within minutes, flipping our speculations and changing the fate of our trades.
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HOW TO PERFORM FUNDAMENTAL ANALYSIS
Once you have decided on fundamental analysis as your course of action, we recommend starting by familiarizing yourself with the instrument you wish to trade. All frequent events that can impact your instrument should be taken into account. You should find the right sources to get daily news and make sure to follow them by subscribing to their newsletter and logging on regularly.
One of the main tools of fundamental analysis is to closely follow the economic calendar. It is crucial for a trader to familiarize himself with upcoming financial events involving influential players in the financial arena, such as treasuries, banks etc. One should learn which events are relevant to his trading market, and then detect how to prepare for those events.
THE IMPORTANCE OF FUNDAMENTAL ANALYSIS
An example that displays the importance of fundamental analysis can be found with the monthly US unemployed report, called the Non-Farm Payroll (NFP). The NFP usually affects the USD rate, which may lead to changes in the value of other instruments, such as gold, crude oil, and others. Before the NFP is announced by the Bureau of Labor Statistics, traders speculate on the content of the declaration and based on that calculate their trades. This is called fundamental analysis.
COMMON ECONOMIC INDICATORS USED
- Unemployment rate
- Interest rates
- Federal funds rate
- Changes in the Gross Domestic Product (GDP)
- Consumer Price Index (Inflation)
- Currency Strength
- Corporate Profits
- Balance of Trade
FUNDAMENTAL ANALYSIS TIPS
To begin employing fundamental analysis, every trader should find a number of informative sources, which will provide him/her with the knowledge that will help with fundamental analysis, thus assisting and improving his trades. We invite you to check out our news feed, which updates on a daily basis with crucial data relevant to all instruments.