Fundamental Analysis

Introduction to Fundamental Analysis

The core of fundamental analysis is to understand and utilize the current market news and market sentiment to get to a prediction of the value of an asset in the future.

Why is fundamental analyses of the market or industry so “fundamental” in essence when talking about the market news?

When considering the economic and political global environment, there a re a few countries that dominate. The economy of other countries hinge as a result on these dominating nations.

For example the United States became one of the main dominating global nations after the 1944 Bretton-Woods conference near the end of the Second World War.

Many countries in the aftermath of the Second World War were forced due to domestic circumstances to currencies and economies to the value of the US Dollar. From that moment the US dollar has been the standard currency on which international trade is denominated. This as a result made many countries dependent on the trade and help of the United States. Russia is another example and for the last decade China has become one of the main players. Its enormous industrialization has placed a huge demand on certain assets such as oil. This made many countries now dependent on China (mainly the African Nations).

In Europe this role has been taken by the German as they have the largest and strongest economy in Europe and thus are pretty much calling the shots which we have seen in the last couple of years when it comes to Greece and they bailout Germany has provided.

So what does this Means?

Today there are periodically programmed announcements concerning key economic and political events that have an impact on world economics. The markets track and monitor these announcements in great details as they can have great implications and impact the future of the world ‘s economy at any given point in time. Depending on the result of these announcements, the markets may respond with either a positive sentiment or a negative sentiment on the economy and currency of the country making the announcement.

If these announcements are made by the main player as described before you will see that all the economies of the countries that are linked to the currency of the large players will also have the sentiment reaction to the announcement. Once market bias has been formed, traders will trade assets based on the bias and could decide to either buy more of the asset or sell it.  Now keeping the scale in mind of the global economy you understand that this has far reaching results and implications.

News announcements can be classified on the basis of the extent of global impact on the world economy and asset sentiment into low-impact, medium-impact and high-impact news. This is the reason as to why the news has such a profound impact in the market. As the market is dynamic and the economic climate for many countries change fast you will see that some announcement that were low impact now have become high impact and vice versa.

Traders who follow the news pay attention to the following news items:

  • Data on manufacturing.
  • Employment Data: Such as jobless claims and the US Non-Farm Payrolls.
  • Some country-specific reports such as ADP Employment change in the US.
  • Gross Domestic Product (GDP).
  • Consumer sentiment and retail sales reports.

Anything that measures consumer sentiment movement is now a key aspects which is to be used by the financial markets in understanding and measuring the economic health and viability of the countries involved.

Fundamental Analysis Components

Traders will look at the following:

  • Actual Number: This is the figure in the news release
  • A poll of leading economists will give an average figure which they expect the news to conform to.
  • Deviation: This is the difference between the consensus figure and the actual figure Consensus/Expected Number:

 

When looking at these numbers you have to understand that all of them in their own are of important but the deviation will indicate provides the trader with the most information.

If for example the deviation is much higher than was expected regardless of the direction (either to the upside or downside) this will give the traders a good signal to base their strategy and trades on.

So when you follow the news and understand what information is to be taken from the fundamental analysis you will be able to trade more confident. Keep in mind that this might also affect you negatively if you have any open positions and the deviations creates a sentiment which is contra to your taken direction in binary option trading.

This is also why you will see way more trading activity right after the announcements are made and less trading activity before the announcements.

Many brokers will give themselves some minutes in which the affected assets for the coming announcement are not tradable as for their risk management perspective the market might move with such an aggressive sentiment and direction that they will right after the announcement have too much exposure.

So you will see that 3 to 5 minutes before and 3-5 minutes after the announcement the affected assets will not be available.