Introduction to Fundamental Analysis

What is fundamental Analysis?

Fundamental analysis is assessing a financial instrument based on major economic reports. In currency trading, these economic reports are termed economic indicators. When investors compare the employment numbers from different zones and trade based on the information gathered, this is a clear example of fundamental analysis.

Economic Indicator

An economic indicator is a vital piece of financial data that can be correlated to a financial instrument. Currencies represent the assets of various countries. When considering economic indicators, it is important to look at data such as: Interest Rate decisions, monthly job numbers, Consumer Price Index, and Trade Balance Data.

Fundamental analysis does showcases a number of vital data over time, but at the same time we get data that are important at some instances and at other instances it is less important. A good example is that of a region experiencing firm growth but yet is going through inflation, investors would be looking closely at the Consumer Price Index with hope of high impact.

News Trading

It is a bit tricky when investor’s trade based on fundamental data. We find situation where numbers come out better than expected for a financial instrument but yet we see a slide in its value. This is mainly due to investor’s sentiment in the market. Investors are fond of speculating on an economic release even before the report is scheduled and place bet based on these sentiments.

Having said this, if we get reports that don’t live up to their hype, it won’t really matter if the data comes out good or not, the market would move in the opposite direction as earlier speculators would  exit their positions. For those who wish to trade the news, extreme caution must be employed as trading the news should be left for market participants who have spent several years in the business.

Summary

You can better understand the currency market or any other market out there via fundamental analysis. Meanwhile, results are not always straight forward, as they seem backward sometimes. Overtime, currencies would always go in the direction of fundamental data. Getting a firm grasp of fundamental analysis would help any investor out there better understand the main reason behind trends and also price actions.