In order to make certain decisions in the market, it's not enough to just follow the charts, experienced traders understand the importance of fundamental analysis.
The movement in the Forex market is set by fundamental factors. These are the key macroeconomic indicators of the national economy that affect the market participants and the level of exchange rates. It is these factors that fundamental analysis studies.
Fundamental analysis methods
Comparison
After the publication of economic indicators, traders instantly begin to react to the extent to which the data differs from expectations, and the exchange rate of the national currency experiences strong fluctuations.
This is where the most common method of fundamental analysis can be applied. If the published data differs dramatically from those predicted by world agencies, traders act immediately.
The more the actual value differs from the forecast, the more violent the reaction will be: for example, a wave of closing positions will follow, or on the contrary, a mass opening of deals in the direction that seemed obvious to everyone.
Seasonality
This factor affects the assets of almost all markets, especially the stock market. In the case of stocks, it is not only the period of quarterly reporting of companies that matters, but also the volume of sales "in season" and ""out of season". For example, some companies generate more revenue in the summer and others in the winter, depending on the industry. This affects the amount of dividends paid, the value of shares (volatility) and investor interest in them (liquidity). In cases where seasonality plays a significant role, various methods have been adopted to eliminate it.
Company sales figures and a range of national macroeconomic data are compared not only with the previous quarter, but also with the same quarter a year earlier. In addition, for macroeconomics, national agencies apply "seasonality elimination" techniques that adjust data by understanding how much they deviate from the norm for that month or quarter.
Besides, before the Christmas weekend, the stock exchanges liquidate and close investors' positions. This should be taken into account, because on a low-volatility market such a movement may result in a sharp jump in quotations. To have a clearer idea of how to behave at this or that time of the year, of course, you should use other methods of fundamental analysis. Seasonality alone is certainly not enough to make a decision to buy or sell.
The same goes for other asset categories, from currencies to commodities. For example, the annual rainy season in America has suddenly dragged on. Now it can ruin the cotton harvest: the volume of available batch will be less than planned, and its prices will soar. It turns out that by tracking such factors and analyzing them in time it is possible to predict the cost of cotton futures.
Induction and deduction
Using induction, a trader gathers together the indicators of various indicators and news that he has read and tries to use them to guess how the price will move in the future. This is how financial analysts work.
Deduction is relevant only to trend trading and is most often included in fundamental analysis of stocks. Its essence is to draw inferences from the general to the particular. It is a very complex technique that often gives a margin of error to the analyzer's self-confidence, but it can be used to figure out what to do with EURUSD when, for example, there is increased concern around the integrity of the Eurozone.
Correlation
It is rather a combined method of fundamental analysis at the junction with technical analysis. The point of correlation is that when the rate of one asset grows, the price of another, dependent asset, can rise or fall in the same way. Previously, all this was calculated by hand, was labor-intensive and non-transparent. Now you can use such correlation indicators as OverLay Chart and Indcor-Correlation on your trading platforms.
Grouping and summarizing
This method is applied at a more professional level. When assets are divided into groups by behavior and characteristics, and then a general index is calculated for them. So, when analyzing the stock market, you can put together your own macroeconomic indicator, like the Dow Jones, with 30 blue chip stocks.
What do you need to keep in mind when doing fundamental analysis?
Monetary policy
Monetary policy maintained by central banks directly affects capital and money markets because it regulates the supply of money and thus directly affects its value.
Legal acts and taxes
Legal acts, local or international, can have medium and long-term effects on capital markets. Legal acts can create barriers or, conversely, act as an impetus for foreign economic investment.
Situation in other markets
The situation in other markets is important when considering an investment decision as to where and when funds should be transferred between countries. When capital markets in one country move in the opposite direction of the trend, investors will start to suffer losses, capital will move out of the country, and may also trigger a depreciation of the local currency.
Situation and company reports
One important factor affecting capital markets is the current economic conditions of individual companies. A positive economic situation of a company may encourage investors to invest their capital in its stock. Poor economic conditions, in turn, may cause investors to shift their assets to other companies and/or eventually withdraw capital from that country.
Economic relations
Economic relations have a major impact on how investors perceive local markets. If a country has strong trade relations, investors view the country as economically stable with the potential for increased profits.