Understanding Fundamental Analysis

19 Jun

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When it comes to the financial markets, there are two main methods that traders use to decide how they think prices are going to move. One of these is known as fundamental analysis, which is the study of news, events and history. It can be a difficult method to master because it is heavily open to interpretation, and it can always be said that there is no right or wrong. Fundamental analysis is used by those who trade everything from foreign currencies to stocks and commodities, and may be a trader’s only method, or may be used in conjunction with more technical analysis.

History 

The old saying ‘history repeats itself’ is certainly seen to be true by those who follow fundamentals. These traders believe that by looking at what happened in the past in similar situations to current market events, they can work out what is likely to happen. Time periods for this can vary, from days to years and even decades.

Trading by looking at historical trends requires a considerable amount of research, because it’ very rare for two situations to be as similar as they initially appear. Generally only experienced traders are the ones who will use this method.

Economic Announcements 

Economic announcements happen on a daily basis, and come from countries all over the world. They range from unemployment figures to consumer confident indexes, and can have all manner of different impacts, whether positive or negative and small or large. These announcements are of most concern to forex traders, who will keep a close eye on the fortunes of world economies. Stock traders will also be interested however, because the policies of central banks can often have large impacts on how well businesses perform, and how likely they are to attract foreign investment.

Economic calendars are particularly useful for this, with most brokers giving their own rating to each event, which explains how much of an impact it is likely to have. Anyone trading forex must be aware of upcoming announcements, whether they are fundamental traders or not.

News 

There are many that believe only unexpected events move markets, and that everything else is already priced in beforehand. Trading the news can be very difficult indeed, because it requires a trader to be able to both correctly interpret how an event will change whichever market they’re following, and act quick enough to take advantage. Open positions are particularly vulnerable to change, which means that even those who are not normally fundamental traders need to be aware of how things may change. Of course, the markets do act quickly, and price charts will change accordingly.

To conclude, fundamental analysis is something that all traders need to be aware of, but to use it exclusively can be difficult. It is also far more suited to longer term trends than the short positions that day traders usually take out.

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