Fundamental Trading Explained: How to Trade Based on News & Data

Fundamental analysis is a strategy which puts forward the base for investment decision making which is done on the basis of real world news, economic reports, and financial info instead of just price graphs or technical indicators. This approach includes study of the inherent value of assets which may be stocks, currencies, or commodities by looking at economic conditions, financial health, and market moving events. To do well in fundamental analysis is to be able to predict market turn arounds and thus make better informed decisions.

Understanding Fundamental Trading: Beyond the Price Breakout

Unlike that which is technical in nature which looks at past price action and trends in the market fundamental trading looks at the root causes of price movement. It studies economic reports, corporate earnings, political and geographic events, and actions of central banks to determine the true value of an asset. For example a trader may look at a company’s growth in revenues, profit margins, and it’s level of debt as a way to determine if the stock is priced too high or low.

Fundamental traders are of the view that in the long run the market price will reflect the economic reality which is at the base of things, thus they put forward this as the basis of their success in the long term. By looking at what is causing market action for instance changes in interest rates or job reports they are able to see through to the core of the issue which technical analysis may not reveal.

Key Economic Factors and their Role in the Markets

To trade on fundamental principles it is of great importance to understand the economic indicators which affect asset prices:

• Gross Domestic Product (GDP): Reflects the health of a country’s economy; strong GDP growth also supports currency strength and stock market confidence.

• Inflation Rates: Impact of inflation and purchase power; as inflation rises central banks may raise rates which in turn affects bond and equity markets.

• Employment Data: Key economic indicators which include unemployment rates also point to health of the economy and consumer spending which in turn play a role in market sentiment.

• Central Bank Announcements: Interest rates and monetary policy decisions which may trigger sudden changes in the market, especially in foreign and bond markets.

• Commodity Prices: For export oriented economies which are tied to commodities, we see that changes in oil, metal, or agricultural products prices may cause large currency and equity value shifts.

Traders which pay attention to the economic calendar do so to see what is to come in terms of data releases and to prepare for that which may cause market fluctuation and reaction.

Developing a Fundamental Trading Strategy

Successful in depth trading which is based in fundamentals has a well thought out plan that includes the use of relevant news and data in to the decision making process. Here is how a trader may put together such a strategy:

1. Identify Key Fundamental Factors: Identify the economic indicators and events that mostly affect the asset you trade. For currencies this may be interest rates and inflation; for stocks, corporate earnings and industry trends.
2. Use News and Data Monitoring: Stay tuned into the reliable news outlets and economic calendars which report on upcoming issues and geopolitical events that which do impact the markets.
3. Analyze the Data: Evaluate present and forgoing data against market expectations. For example, when we see earnings reports that beat out expectations the stock price goes up, at the same time under performing economic reports may see a currency drop in value.
4. Combine with Technical Analysis: Use technical charts and trends to determine best in and out points, which in turn confirm the fundamental signals via market momentum and support resistance levels.
5. Risk Management: Set at what point to exit if the market goes against you and which way the trade will go before the market moves since news driven markets are very volatile and hard to predict.

Fundamental traders that pay attention to long term trends may analyze economic cycles and also which play in the short term use recent market reaction to news for trade.

Navigating Currency Markets with Fundamental Analysis

In forex trade, we see that fundamental analysis puts large emphasis on national economic reports and central bank actions. Traders may use methods such as:.

• Leveraged Carry Trade: Buying out of currencies which have high interest rates and selling which have low rates to profit from yield differentials. This approach works well in stable economic and interest rate environments.

• Economic Calendar Trading: In short term trading of which Non Farm Payrolls (NFP) and CPI data and central bank decisions are a part, we see the attempt to capture the fast price movements.

Understanding that which economic factors play into currency strength is key, for example a strong job report will do in increasing a currency’s value and at the same time a dovish central bank statement will cause it to drop.

The Ups and Downs of Fundamental Trading

Advantages:

• Provides in depth perspective into what is really behind market action beyond price fluctuations.
• Identifies large scale trends which in turn inform on intrinsic value.
• We can predict major market shifts which are a result of macroeconomic factors or geopolitical events.

Challenges & Issues:

• Requiring in depth research and continuous monitoring of global economic data.
• News based markets are very volatile and hard to time.
• At times which is data that we see versus what the technical indicators are telling us, that’s a skill which is required to balance out.
• Long term perspective is out of place for those who trade in very short term price action.

Many a time successful traders use a combination of fundamental and technical analysis which plays to the strength of each.

Practical Tips for Getting Started

• Follow economic calendar reports which are reliable and set up alerts for major data releases so that you are ready for the market action.
• Keep a record of market news, your analysis, and trade results which in turn will improve your decisions as you go along.

Start out with demo accounts as you test out your fundamental strategies which in turn will help you see how news affects price action without putting at risk your capital.

Diversify your information sources

Maintain focus by staying true to your trading plan and at the same time manage risk very closely during times of high volatility.

Fundamental analysis which is the backbone of what we see from investors and traders presents them with a structure which is based on fact and real world events thus providing a strong framework in which to analyze market action. Through study of the balance between news, economic reports and asset value we see that traders may improve their results in very complex markets which they trade with confidence.

Defines fundamental analysis and explains top-down vs bottom-up approaches in evaluating intrinsic asset value (IG)

Covers methods such as financial statements, DCF, intrinsic valuation, and combining fundamental with technical analysis (Investopedia)

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