How to Use Fundamental Analysis

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One of the first questions a beginner trader generally asks is “how do you know where the price of an asset is going.” This common question does not have a straightforward answer. The reality is that nobody knows exactly which way a market is going. Each trader performs his or her own analysis which helps provide them with the edge they need to speculate. There are several different kinds of analysis that you can use to help you determine which was a market is likely to move. One of the most popular is fundamental analysis.

What is Fundamental Analysis?

One of the best ways to learn how to analyze the capital markets is to evaluate the information that is available. In theory, all the currently available information is already incorporated into the price of a security. When new information becomes available, it is quickly priced into an asset. So, fundamental analysis is the study of information. This includes macro information, which can be categories as economic, monetary, political, or in the case of stocks, earnings, and profits. When you evaluate these criteria, you can then try to determine if the value of the assets you are evaluating is fair.

Examples of Fundamental Analysis

The currency markets are driven over longer periods by fundamental information. The difference between the two countries’ interest rates has historically been the fundamental drivers of a currency pair. This is known as the interest rate differential. A currency pair is valued by the exchange rate. For example, the value of the EUR/USD is the exchange rate of 1.12. This means it cost 1.12 US dollars to purchase on Euro.

Another example of fundamental analysis which is generally performed for online share trading is evaluating an earnings report. These reports generally come out quarterly and provide information about how a company executed during the prior quarter. This information along with the guidance that a company provides is new information that can drive the price of a stock.

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How Can you Find Fundamental Information?

One of the best ways to track economic data that will move the value of a currency pair is through an economic calendar. This is a calendar that tells you about all the economic releases that will be reported during a month. In addition, most economic calendars have an estimated value of a report along with the prior months’ data. Once the economic data is revealed you can compare it to the actual release. Depending on the release the new data could be market moving. Data points such as a jobs report or retail sales can be market moving. In addition, a monetary policy report from a central bank could also move the markets.

Summary

Fundamental analysis is the study of information. A goal to be to determine whether all the current information is incorporated into the price of an asset. When new information becomes available, the price of an asset can move. You can track the releases of new information by using an economic calendar or a financial calendar that shows either economic releases or when companies are releasing their financial results.