To improve your trading effectiveness it is very important to understand why the market moves and what factors impact these movements. Fundamental analysis consists of studying the different elements which affect the future price of an asset as well as how and why these elements affect the price. while analysing fundamentally, traders need look at a variety of factors such as economic data, government policies and geo-political factors and will need to analyse how these factors impact the asset prices.
The fundamentals that are the core to Fundamental Analysis include a broad range of data and events. Often, a major event can impact the market drastically causing major price changes. This can be anything from a terrorist attack, an interest rate change by a central bank, a natural disaster, an announcement by a company and much more. The range of factors that are considered fundamental creates a dynamic and ever-changing market force which is why Forex trading is so exciting.
To understand how certain fundamentals impact the market, let us review some of the most powerful factors. The first factor is interest rates. That is, as a country raises interest rates, their local currency strengthens and the reverse is also true. The reason behind this is that a higher interest rate will encourage investors to shift their asset to the country in order to take advantage of the higher yields. Another fundamental that plays an important role in impacting the trading market is the employment situation. That is, strong employment is a good gauge of a strong economy, while weak employment shows an economy that is struggling. When an economy is struggling, it is likely that it will lower interest rates and this will then undermine the value of its currency. Let us turn our focus now to trade balance. This economic fundamental can influence the value of a country’s currency. That is, a large negative trade balance can cause a weak currency as commercial interests are forced to continually sell large amounts of the country’s currency. Finally, the Gross Domestic Product (GDP) of a country can impact the currency market. The GDP is a reflection of the overall economic activity of a country and traders follow this data very closely. A higher GDP shows a stronger economy, which in turn leads to higher interest rates and generally, a stronger currency.
Need for Fundamental Analysis
Fundamental analysis is very useful in determining overall trends, if not exact prices. As an example, unemployment figures can give a good idea of the health of a countries economy, especially over a period of time as increases and decreases are noted. However, a single unemployment report is insufficient to determine an entry and exit strategy for a particular asset. Instead, several fundamental data points are often combined to come up with a general trend and technical tools are then used to determine exact entry and exit points.