A market fundamental is a piece of specific data or event that causes money to flow either in or out of an underlying asset. As a trader we attempt to find the strongest currency and pair it with a weaker one. This means when trading a fundamental strategy, we will be looking for a series of data points that makes one more attractive than the other.
Knowing this, traders should be factoring in things such as employment data, inflation, interest rates and even political turmoil before buying a particular currency. If the underlying fundamental data is improving or getting stronger we have found a candidate currency to buy relative to another with poor performance.
So now that you are a little more familiar with what a fundamental is, now we need to find all this data so we can make an educated trading decision. Every good fundamental trader should have access to an economic calendar. This is where we can see which data points are being released from week to week.
Traders should keep an eye on the calendar at all times, as data hits or misses expectations this will ultimately change our fundamental outlook on a currency.
These are the events that our normally monitored by policy makers such as central banks and have the ability to immediately influence market price. While these events are certainly important, just watching events such as this week’s employment figures for the US may not give us an overall opinion of the market.
The key to trading fundamentals is to combine a variety of data points to then make an educated trading decision.
Whether there's an upward or downward trend, either over the long or short term or to identify range bound conditions. The most common types of technical analysis charts are line charts, bar charts and candlestick charts.
When using a bar or candlestick chart each period will give the technical analyst information on the price from where it opened, the high or low of the period as well as the close. Candlestick analysis is especially useful as the patterns and relationship within them can assist in making forecasts about the future direction of the price.
Once a trader has mastered the basics of charting, they can then make use of indicators to assist in determining the trend.
There are various tools and techniques that can be used for fundamental analysis, but they have been categorized into two types of fundamental analysis: top-down analysis and bottom-up analysis. Top-down analysis takes a broader view of the economy, starting with the entire market before narrowing down into a sector, industry and finally a specific company. Conversely, bottom-up analysis starts with a specific stock and widens out to consider all the factors that impact its price.
Most fundamental analysis is used for evaluating share prices, but it can be used across a range of asset classes, such as bonds, Futures and forex.
The tools that traders might choose for their fundamental analysis vary depending on which asset is being traded. For example, share traders might choose to look at the figures in a company’s earnings report: revenue, earning per share (EPS), projected growth or profit margins. While futures traders may choose to assess the figures released by central banks that allow insight into the state of a country’s economy.