Trading Academy

Lesson 21

What is Fundamental Analysis

Fundamental analysis implies a study of how economic data affects the global financial markets, which include, of course, currencies. It involves discovering and predicting the causes of major trends and for this, it uses a number of factors and indicators to present a comprehensive picture of global finance.

Economic fundamentals are based on: economic data reports, interest rate levels, monetary policy and international trade/investment flows. Fundamental themes will shift in relative importance to one another. All the news and information that reflects the macroeconomic situation of a country will be reflected in the valuation of its currency.

Fundamental  data may be classified into economic factors, financial factors, political factors, and social events. Using such data will allow you to predict money flows into and out of a particular currency.

For a fundamental approach to trading, follow these steps:

  1. Gather current global data on Gross Domestic Product, interest rates and inflation levels.
  2. When studying interest rates, group currencies in: a) countries expected to raise rates; b) countries expected to keep rates the same; c) Countries expected to lower rates.
  3. Choose which currency pairs to trade and closely follow the calendar for economic releases.
  4. Couple fundamental analysis with technical analysis to decide on the timing of a trade (entry and exit)

Keep in mind:

  • Fundamental analysis is very helpful in determining price trends;
  • News items to be considered are related to economic, political or social events;
  • The most important economic events are monetary policy meetings and employment reports;
  • Both fundamental analysis and technical analysis are very powerful ingredients, especially when coupled together.
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