Fundamental Analysis Explained

Fundamental Analysis Explained

Fundamental analysis is a method that involves estimating a security’s value by analyzing economic, political, and environmental factors and studying what may affect price in the future.

You could say that fundamentals focus on the driving forces behind market movements, while technical analysis emphasizes price movements on a chart.  

Fundamental traders usually hold positions for a long-term gain.

Examples of fundamentals

Any occurrence that changes a currency’s intrinsic value forms part of fundamental analysis and can be characterized as economic, political, or environmental.

Economic factors

 

Political factors

  • Presidential and regional elections
  • Election of reserve bank members

 

Environmental factors

  • Disease outbreaks such as COVID 19
  • Natural disasters e.g. earthquakes

How fundamentals influence value

The interaction between buyers (demand) and sellers (supply) determines the market price. Fundamentals influence the decisions made by bulls and bears, affecting valuation in both the short and long term.

Generally, a strong economy with high interest rates equals a bullish currency.

In contrast, a weak economy with low interest rates equals a bearish currency.

How to trade using fundamental analysis

  1. Study all the available economic, political, and environmental information.
  2. Determine what you believe is the current “fair value” of the asset. This is not always the current price since the market can be undervalued or overvalued.
  3. Place a buy trade if you believe the market is undervalued or a sell position if you think it is overvalued.

 

If you have trouble calculating the fair value, thankfully, Forex makes trading fundamentals easier.

Since two currencies determine an exchange rate, you can simply buy a strong currency vs a weak currency.

Say the Federal Reserve is raising interest rates, and the USD is performing well.

But the South African reserve bank (SARB) is cutting interest rates, and the ZAR is falling.

BUY USD/ZAR!

And you could make a healthy profit in the long run.

Does fundamental analysis work?

Yes, fundamentals are the driving force behind price changes, so you will make money as long as you are aligned with them.

Just remember, with all approaches, you will encounter losing trades along the way.

Conclusion

If you would like to be a fundamental trader, you need to put in the work to study and understand all the factors that impact market pricing.

Also, make sure to have a systematic approach to your analysis and execution so you can remain objective and prevent emotions from getting the best of you.

May the market be with you.

Side note – To remain on top of all fundamental news events, trade with a broker with a dedicated economic calendar such as Plus500

Fundamental Analysis FAQ

Fundamental analysis is a method that involves estimating a security’s value by analyzing economic, political, and environmental factors and studying what may affect price in the future.

Fundamentals determine supply and demand and are the driving force of financial markets.

Buy a strong performing currency with a high interest rate against a poorly performing currency with a low interest rate.

Yes, you can make money as a fundamental trader as long as you dedicate time to understanding the economic, political, and environmental factors that determine value.

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Guy Seynaeve

Guy Seynaeve

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