Fundamental analysis is the study of markets by looking at underlying factors such as economic health, political indicators, geographic or environment factors.
Fundamental analysts are looking for mispriced markets where the data suggests that a price is either lower or higher than the underlying market indicators suggest. A trader would be looking to make profits by placing a buy or sell trade on the mispriced market and then waiting for the market to re-align with the ‘true’ price.
Technical Analysts use mathematical indicators as trading signals and assume that all economic health ratings are built into the price therefore it is a very different method of providing trading signals. However, a Fundamental analyst who has found a mis-price in the market may also use technical analysis to decide the best entry point.
What are Economic Indicators?
Fundamental analysts will closely follow public announcements by government and industry bodies that use standard statistics to represent the state of the economy. These statistics are called Economic indicators and help traders understand the ‘health’ of the economy. These indicators are released at specific times during the calendar year and are published for all to see. Traders should be aware of the timing of key Economic updates and use both the timing and information in the announcement to guide their trading activity.
It may not be important to fully understand the Economic indicator but a Fundamental analyst will recognize the impact of an announcement. For example, if the quarterly interest rate announcement is expected to remain the same but instead it is increased – what might be the impact to the market of a higher than anticipated release. Particularly when you think of the number of traders across the world that are monitoring these releases. Its useful to understand what the trading reaction might be to a lower or higher statistic and how a market price might change as a result.
Key economic indicators are GDP, which measure economy growth, non-farm payroll, which measures employment ratings and CPI, PPI, which both measure the change in price of goods i.e inflation ratings. See our detailed summary of economic indicators for more information.
A good example of fundamental data is a government election. If one party’s manifesto is to increase taxes and limit business development or ties with Europe , should that party come into power then this may have a significant impact on a market price. Alternately if a party supports business development and reduces levies to improve international trading then this may boost company profits and currency investment.
What next ?
Hopefully this has helped you realize the importance of watching economic indicators - and knowing which data are most likely to move markets and impact currency traders. Remember that economic indicators or Fundamentals can be specific to a single country but may have an impact on others that rely on that economy. Announcements in the US because of its relative size globally are always watched by traders regardless of where they are trading.
If you are still unsure, try another section in our education or open a demo account and test out your trading strategies.
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