When trading, it is important to devise strategic ways of entering the financial markets to have profitable trades. One of these ways is the approach known as the Fundamental analysis.
Fundamental analysis is the numeric study of the market by taking into account the different economic, political, and social occurrences that will highly likely affect the price of an asset.
Moreover, the fundamental analysis aims at determining specific factors or reasons behind market price movements.
The forex fundamental analysis is focused on studying drivers of currency prices. Some of these are central bank decisions (interest rate cut/hike), economic news updates, political happenings, natural disasters, and Intermarket movements (equities, bonds, commodities, etc.).
Importance of the Fundamental Analysis
Using the Fundamental analysis approach as the trader’s lens in taking an analytic view of the market enables them to zero in on the market fundamentals, which pertain to the idea that prices are driven by supply and demand (economics rudiments). The fundamental analysis of stocks deals with studying the factors affecting the supply and demand for currencies.
As the basic economics principle dictates, a demand for a particular currency will make its price go higher, while a strong supply of the currency will result in a depreciation of its price. Accurate reading of the fundamentals shows when the demand and supply dynamics of currencies are changing.
In another way, the fundamental analysis helps traders check their emotions. When traders know why the prices move, they understand and remain upbeat when prices do not favor their trades.
Fundamentals of the Fundamental Approach
After answering the question, “what is fundamental analysis,” let us delve into the process of conducting fundamental analysis for dummies and help you save time looking for fundamental analysis books.
The first thing a trader should do is to keep abreast of the economic updates and anticipate the upcoming ones that are likely to impact currency values. The economic calendar is the best tool to use when looking for economic news.
A big part of the fundamental approach is the research and analysis portion. After reading the event, look for reports or commentaries to find out what analysts say about it. Analysts have the best interpretation of recent market developments.
The probing part is also a crucial step in the fundamental method of market analysis. The trader needs to know the cause of the current trend or move. The trader should also check if the same factors are still the reason behind the price change and identify the longevity of the impact or reaction of market participants to an occurrence. Having these steps to come up with a good analysis of the market fundamentals makes this approach a daunting one for traders, especially for beginners. However, familiarity with the process gets things easier as time goes by.