There are several ways to trade profitably in the financial markets. Each way requires some form of analysis to increase the overall probability of making a profit on your trades. The type of analysis that many people find success with is fundamental analysis. Fundamental analysis is a method used by revered investors and traders that range from Warren Buffet to Paul Tudor Jones, and Stanley Druckenmiller. This type of analysis allows investors to understand the underlying factors that contribute to the price of a financial asset, enabling specific or broad intrinsic value conclusions.
In this article, we will look at how to make trading decisions using fundamental analysis.
Fundamental Analysis is Applicable in Many Types of Markets
The first point to consider is that fundamental analysis is useful in various types of markets, such as the equities market, where one may conduct fundamental analysis on publicly traded car companies or investment banks. Unsurprisingly, it is also applicable to markets such as commodities, forex and other derivatives.
Fundamental analysis is vital in many types of markets because price movements are a function of supply and demand, and fundamental analysis can help predict the supply and demand for almost any asset. . Those who understand the factors that affect supply and demand will have a better system to forecast market outcomes and ascertain values.
An Illustration of Fundamental Analysis
A trader must understand the potential for gain in every trade. To gain that understanding. they can look at everything from economic data to specific new stories that can meaningfully move markets. Here is an example of how a trader can utilise fundamental analysis in their forex trading strategies to increase the probability of a profitable trade.
Take, for example, a trader who wants to open a trade on the USD/JPY. The trader would like to know more about the relevant economic data, geopolitical background, and other aspects that may affect currency prices.
Again, one would want to be aware of critical financial data that would affect the supply and demand of each currency in the pair, and accurately assess the information that pertains to these factors.
These factors will include interest rate decisions, the strength of the labour market, deficits, inflation, and other factors that show the strength or the weakness of the country’s economy and its respective currency.
If a country has reasonable and rational fiscal and monetary policies that contribute to overall economic strength, the expectation is that its respective currency will strengthen.
If it conducts poor planning or has experienced economic setbacks, its currency should weaken.
Fundamental analysis in forex markets can be quite tricky depending on the specific pair because of increasing levels of globalisation and sensitivities to global events.
This type of analysis can certainly be fun and exciting but requires the trader to enjoy poring through specific data points to make decisions.
An Important Point to Remember
Remember that fundamental analysis is one tool that enables a speculator to have an overview of the market, or specific asset class. It helps to provide more context. A proper overview allows a trader to account for risks that a technical analysis approach may not offer. A trader should pair technical and fundamental analysis in their trading systems.
