In this article, we will tell you about fundamental analysis, give the bit-by-bit guide that can be used even today to make your very first steps in fundamental analysis. Furthermore, we will present several cases for making money on news and events – proven ways to get a high-chance and fair profit.
If you are a beginner trader or skeptical against fundamental analysis, this text is to help you realize it better. Confusions usually appear when fundamental analysis is perceived by most individual trader as a too complex one. That’s why, most traders fear it. Numerous experienced and prosperous traders keenly tell it is a really hard task to catch a moment of significant effect of fundamental factors in today’s open world. They are right in some measure, but let’s make it clear.
1. Fundamental analysis – what is it? First things first!
2. What causes unpopularity of fundamental analysis? Move along!
3. Fundamental factors and their effect on asset prices4. How to use fundamental analysis
What is fundamental analysis
Two analysis types are used in financial market trading (financial markets are understood as the security market, Forex, binary options, etc.): fundamental and technical.
Technical analysis deals with charts. Regularities are looked for in the chart, which help traders forecast the further status of a quote. “Forecasting” is based on experience of previous trades – patterns of curve behavior (some math-like stuff here) are taken from previous sessions and translated to the current chart with a view of realizing further movement of the asset quote. The key thing is that the technical analysis roots on the fact that all world events are already considered with price, i.e. the price for analysis applying technical analysis, dwells in kind of levitation – the state of no external stimuli. Read more about the technical analysis here: Technical Analysis: 3 Postulates, Chart and Types + TOP 8 Tricks.
Fundamental analysis has nothing in common with charts and diagrams. It’s based on real economic events causing market movements. Events can be either positive or negative for an asset. Positive-nature events create an upward trend for an asset, while negative-nature ones create a downward trend. 90% cases follow this pattern, though exceptions happen. For instance, Japanese Yen that falls with positive news and, conversely, falls with negative. Put in other words, fundamental analysis looks for chart formation reasons, while technical analysis endeavors best efforts to forecast the direction, when fundamental factors’ impact is weak.
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Why is fundamental analysis not so popular?
Just because it is more than meets the eye. Most trading tutors usually teach strategies based on technical analysis only. They also generally abandon fundamental principles as “already put in asset cost” and “not having to do with”. In this context, a brand new broker, Bintrader, looks good as far as it recommends mastering fundamental analysis along with technical methods.
The prevalent reason for that is that technical strategies and trading bots are extremely understandable and easily sold. Imagine you had a choice:
First way. Make money from a simple system that has already made the bulk of work for you.
The only thing you have to do is to wait until the indicator turns blue, in order to buy an asset; or red in order to sell it. And if this strategy is decoded in a fantastic robot that made all that for you and in your absolute behalf!
Your role would be only to connect it to the network, and then watch for this great money that accumulate on your account.
Second way. Do all the stuff yourself. It means you have to get up earlier in order to flick through the freshest news and discover the market mood. Should you like Asian assets, do not even get to sleep. Tokyo and Shanghai time have 9-10+ hours against European time, so when you go to bed, Asian session just gets off. Besides, Asian markets are busy even on Saturdays, in contrast to Europe and America.
Obviously, the majority is likely to select the first way.
However, the truth is always somewhere in between. Trading in the short term within a day? Technical analysis with all its tricks it what you need. Long-view trading assumes involving fundamental analysis – wide-timeframe technical analysis is not that efficient any more, as the possibility of external effects’ impact is higher in the long term.
The majority of professional traders and investors use fundamental analysis as the very root of their decision-making strategy. Let’s count the true major industry players and realize they mostly prefer fundamental methods. Just take a glance at financial news channels – traders usually drop technical analysis when charting.
They prevalently use large news terminals, such as Bloomberg, Reuters, Dow Jones, MNI, and so on. Terminals are dedicated just for swift fetching news and info straight from the source. Every single license may cost up to thousands of bucks per month! Big companies and banks spend hundreds of thousands each month to get a bit of the most precious and freshest information.
From the other hand, price charts and technical indicators are usually free.
This way, almost all professional fund managers apply fundamental analysis and insights. However, individuals rarely use it. As mentioned above, fundamental analysis is not that simple as it can seem to be for an unsophisticated trader. So, months and even years will come before they learn to interpret fundamental factors correctly and consequently make money with them. Before rushing on the betting-field, take your time to pull up your technical and fundamental knowledge.
Be advised that fundamental analysis, just like technical, cannot provide you with 100% profit guarantee.
How fundamental factors affect asset prices
When something occurs in the real world, asset prices immediately respond. This is true either for the long or for the short term of trading.
For instance, when Britain voted for Brexit in 2016, the pound urgently fell by 20% in USD/GPD. That was a clear example of market reaction on the referendum results. The reason for such response is that professional traders watch for news and then try to act up. Everybody knew then that if the voting outcome had been for exiting the EU, the pound would have dropped shortly after it. That’s what exactly happened.
Markets regularly move in waiting for and reacting on main events. You don’t have to be an expert trader to see and recognize market movements. Actually, you often can explain the affairs just watching a news channel.
The latest fundamental analysis study shows that market professionals’ psychology does affect events. For instance, negative expectations can sink an asset in deep loss waters, and then, one will totally have to become skilled before realizing what events are to assert influence.
If you are a beginner trader, the gigantic flow of conflicting info and “accessible 100%-profitability strategies” may seem to be enormously overwhelming.
But, if you possess some experience, you must be disappointed by the switch trap that caught you some times. What is switch trap? It looks like as follows:
- You find a strategy you perceive to be fantastic.
- You carry out the reverse test that looks brilliant.
- Exalted by earning perspectives, you start trading on Monday morning.
- Results you get before, to say, Wednesday, are not similar that those in tests. Result: the belief in a specific strategy faltered.
- You start searching a “better” strategy to test next week.
- This cycle goes over and over again, as you constantly look for a better system.
If you already “tried” such a cycle, you probably know how terrible it can be. Good news: steady use of fundamental analysis in this context will change the trading perspective forever.
Realization of fundamental factors resembles taking off a blindfold. For the first time in your trading career you will realize what is going one and why currency prices move the way they actually do.
Recognition of reasons brings confidence. The approach and attitude change when you clarify reasons that drive you to trading. And the success will not be long in coming when you get it clear why the price changed that very way.
Even if losses are the only result so far, you can accept failures, because you know why you fail. You are free to analyze and find roots your losses stem from. Each and every deal becomes transparent in how to hone your skills and improve results. This is how the human brain works – it needs explanations and reasons. If it’s difficult to interpret something, it festers for a while, but then passes away.
Using fundamental analysis will give you explanations in trading. Most experienced traders combine technical and fundamental analysis in trading. For instance, a team of Breaking the Flat Strategy and fundamental analysis gives great results. Find more details about the strategy in the video.
A simple example. An asset follows the news signal, but there is no trend. Such things happen, the market is not always shortly determined with a news. If you manage to find a consolidation zone in the chart, then you are all-set to use this strategy.
Starting working with fundamental analysis
So, you would ask how to learn fundamental analysis basics. To make fundamental methods clear and understandable, we will start with simple steps to move us toward learning fundamental factors having impact on markets.
Step 1 – Collect information sources
Usually, it’s usual to use news and analytical data sources in order to get needed details fast. It can be Reuters or Bloomberg. Besides, economical calendars should be accentuated. They are economical events calendars that show when a specific news is to be published. Most calendars provide display the impact level of an event on market assets. There are some events that are likely to significantly affect markets, while there are some that can be not even noticed. For instance, state Central Bank’s decision on discount rate virtually always affects the national currency rate.
You can find best free news and analysis sources below in order to start working using the fundamental analysis. I strongly recommend you note them and regularly check. Control movements of currency pairs through reacting news and events you study. In the beginning, I will tell you about some English-language resources, and then describe Russian analogs. Be advised: English skills would be welcome. Most events causing market movements initially occur and are described in English. English language knowledge will let you get to know the news and make an operative decision having played on an event.
Forex Factory is considered one of the best free news calendars on the Internet. This is a very convenient website, simple in navigation. Each week, you shall study this economic calendar to see what events currently take place.
This will give you the answer which answers may be the most efficient on upcoming trading sessions.
FX Street provides the constant flow of free news and analysis materials. They have their corporate content creators making information truly efficient for traders. You will recognize how economical bulletins and events you see in the calendar, can affect prices of the corresponding currencies.
Forex Live Team is the outstanding group of analysis that are focused on analyzing events in the event market so far as they actually occur. They display the real-time analysis thereby ensuring one of the greatest ways to know how fundamental analysis works.
Alpari provides a totally friendly economical calendar. Frankly, this is the same calendar made by FX Street, but translated into Russian. Alpari is the Russian greatest Forex broker providing noteworthy news.
I suppose it is the most famous global investing resource. Russian version is provided, but not all the news are translated into Russian. Has its own “bullish” calendar: the more bulls are nearby the news, the higher impact it has on markets.
Step 2 — Learn how to interpret what you read
Realizing how to interpret and use news is the key component of successful trading. In order to make it clearer, you should watch for 4 core elements in any news article. If it is impossible to extract four elements, just drop the certain information unless you get more knowledge and experience.
The first element of each article is a currency or currency pair that is the article is dedicated to. It can seem to be simple for the first sight. But not even close: sometimes, articles do not even mention a currency pair, or a text may have a politic character and provide general analytics. It’s a tough job to trade with such publications.
The second element is the expected direction of the asset movement. One can read a bulk of letters but not realize author’s position on where an asset will move to.
The third element is the clear position why movement is expected in a certain direction.
Last but not least, there must be the clear opinion or direction expectation from most trusted experts. This opinion must be rooted from analysts and traders, but even economists or officials may constitute the source.
They were the four factors that will enable you to develop a clear vision of news’ impact from the fundamental point of view. In return, you will get trading ideas that can be practiced and tested.
Step 3 — Practice and Practice
You will surely be surprised how fast new trading ideas appear. Constant practice and studying trading news will eventually lead to an occurrence some day when you start creating your own strategies based on your notices. Not to start from the scratch, we recommend you watch our beginner’s tutorial. There are lots of video lessons on the channel, and they are constantly replenished.
The only thing you have to keep in memory is that you won’t succeed from the very start. The time will pass before you learn to mark out significant effects from the news noise. It’s an impossible task to complete within one-two weeks, and one should take their time to master fundamental analysis sufficiently to use it in real trading and getting profits.
TOP 3 methods to make money with fundamental analysis
Let’s get to the matter – how to make money with fundamental analysis. Here are three proven ways to make money with fundamental analysis.
Rates of Central Banks
One of the most noticeable events in financial markets is the decision on the rate of leading-states’ central banks.
Rate increase usually leads to rise of the national currency rate, and when the rate decreases, the rate falls. Flat rate will cause strong weakening in case of upward forecasts, and will lead to increase in case of downward forecast. This is as it usually happens. But today, it can be not as it is expected to be. The central bank conference is usually preceded by interviews and statements of central banks’ officials, which give hints regarding rate depreciation even before the conference. It often happens when forecasts on rate movement turn out to be almost 100%-true by the central bank conference, and this means that the national currency had already played regulator’s rise/fall of the rate. The same situation took place with the Federal Reserve System rate in March 2017, when the dollar decreased after increase of the Federal Reserve System rate, as before that, it had been rising along with comments of the Federal Reserve System Chairman that had been stating about inevitable increase.
There are lots of them, but here are some of them:
- Consumer price index or inflation
- Gross domestic product
- Consumer activity index
- Industrial production index, service industry index
- Import/export data
Inflation in developed countries for the last 5 years has been on the extremely low level, and even came to the negative. A good instance is Japan, where economy suffers from prices and consumer passivity. The Land of the Rising Sun has the negative inflation, and Tokyo struggles for increasing it. The same problem is faced by other states: mostly, in the EU, US, etc., inflation level of 2% is the target for most central banks. Weak inflation data always have the negative impact on the national currency.
Gross national product: the higher the better. Consumer activity index constitutes the very significant indicator in developed economies, where consumer activity index strongly affects the GDP. Consumer segment is the greatest in the US, where 80% of economy is held by purchases of ordinary nationals. Therefore, each and every consumer activity indicator in the US has the considerable impact on dollar. Watch for it.
Industrial production index is the very significant indicator for producing countries. For instance, it is Germany, where industrial production is the flagship of economy. Weak data on it immediately affect euro and stock market not only in Germany, but also in France.
Import/export indicators make sense for everybody. However, pay special attention to import/export of China and Japan. Both economies are export-oriented, so weak indicators are able to negatively affect national currencies and stock indices.
Political tempest, catastrophes, natural disasters
Impeachment of South Korea’s president drowned the stock market of this state down to the negative bottom. Trump’s words on southern border wall caused extreme pressure on Mexican peso. Outcomes of Brexit depressed British pound. Acts of terrorism in Paris led to sales on the French stock market. This list goes on.. Just track the news and you will get the thing.
Read the news and learn to use them to make money in the market.