Fundamental Analysis

Trading strategies of successful traders in any security class depend a lot on analysis or research. Research and analysis is the backbone of a seasoned and professional trader. The primary objective of various research and analysis is for forecasting the price trends of any security.

There are two types of widely recognized analysis viz. fundamental and technical analysis. The approach and the methodology of both the analysis is quite different from each other.

Fundamental analysis as the name suggests is the analysis based on the fundamental attributes of any asset class. Fundamental analysis is oriented towards long term approach. Technical analysis is the analysis of historical price and volume charts/graphs of any security. Technical analysis attempts to analyze the short term behavior of price movement.

In this article we will discuss Fundamental Analysis:

1. If the asset class is a stock of a company then the fundamental analysis revolves around studying the financial statements and growth prospects of a particular company or the business sector. Fundamental analysis of commodities such as crude oil, base metals, precious metals and agricultural commodities makes an attempt to study the factors related to supply and demand mismatch.
2. In forex market the fundamental analysis lays stress on the overall economic parameters of a particular company. It boils down to studying a nation as a company or a corporation. There are number of variables that determine the weakness or strength of currency rate of any country. Besides the economic variables, the social and geopolitical events can also greatly influence the ups and downs in currency rates.
3. There are various core underlying numbers of a particular country’s economy that can influence the fluctuations in forex price. Interest rate, GDP, unemployment rate, international trade balance, consumer price index and other inflation measures are few widely anticipated economic indicators. However, the list is not exhaustive and you should also watch out for other macroeconomic numbers. I would suggest that instead of information overload you should try to understand the likely impact of interest rate, GDP and other core numbers on the currency valuation.
4. As a trader you must keep an eye on various reports and data releases about the economic indicators of a particular country. You should keep a handy guide to the calendar of important economic events that can capture the attention of forex markets. The calendar should indicate the type of report, period, date of release, and the likely degree of its impact on the currency rate. It makes more sense to analyze what the market expects from these reports and subsequently how the market behaves post data release.

Summing Up

Fundamental analysis is a very wide subject that involves study of multitudes of numbers and variables. This article is just a brief guide to what to look out under fundamental analysis. There are different models and theories to inter-relate various numbers and its projected impact on the forex movement.

Monitoring each and every fundamental and then co-relating its influence on the currency movement is a mammoth task for a single individual. Besides the self assessment, the forex currency traders also rely on the views of experts in the field of fundamental analysis. Besides the views of experts, look out for the speeches of financial watchdogs like central bank chairman and the monetary policy authorities.