July 24, 2024

Business Bib

Business & Finance Blog

Brief Introduction to Fundamental Analysis

3 min read

Fundamental analysis is usually considered to be the opposite of technical analysis. However, what does it really entail? What aspects does it cover? We’re going to discuss those questions in this article. Read on!

Reasons to Use Fundamental Analysis

Traders use fundamental analysis as a very efficient method of projecting the overall economic conditions.

When looking at the initial estimates of experts when it comes to the upcoming report on GDP or employment of a country or region, it’s difficult to know exactly how the economy is doing while considering all the possible contributing factors. What’s more, it’s difficult to incorporate all these into one strategy to use.

Establishing a Model

A trader who uses fundamental analysis will typically come up with a model on which his or her trading strategy will be derived.

This model should encapsulate a set of empirical data, with the goal of predicting market behavior and determine future values of currency pairs (or even the prices of stocks) by using a host of historical values of economic indicators.

There is a massive number of models already established as well as analysts who use them. That’s because different people may look at one and the same set of data from a different perspective. That means they will draw different conclusions regarding the future of the market.

Overall, it is necessary to have a deep understanding of each economic and fundamental indicator before coming up with your own conclusions.

What Does Fundamental Analysis Cover?

For forex traders, fundamentals are the major forces that drive a nation’s economy. These include interest rates and central bank policies to political events and natural disasters. Together, they form an intricate combination of trading plans, market behaviors, and unforeseen situations.

In the Stock Market

When it comes to the stock market, fundamental analysis is used to estimate the intrinsic value of a given company. Investments will then be based on this estimate. In many ways, fundamental analysis in forex works just like fundamental analysis in the stock market.

The macroeconomic repots, social news, and political news are very similar to the updates on corporate  news in a way that the whole information is used by investors and analysts so that they can form an estimate of the company’s real value.

This value usually changes with time due to the effects of the many factors like the economic stability of a country and the nation’s financial firepower.

Market Expectations

In the financial markets, information goes in and out in a matter of seconds. This is the reason why speculations and expectations about some event and information impact the market even before the event actually takes place or the data released.

The market could be very volatile during that period. This is the reason why there is so much of a rush and expectation on the run-up to the news release. It’s not surprising that sometimes the expectation  of the market becomes much more important that the actual news being released.

A huge chunk of traders come up with gameplans and enter positions by comparing the potential actual data and the forecast figures and then determining how the difference between the two figures could affect price action. Get Wibest Broker Forex Education and Wibest Forex Brokers List at their site