Understanding Fundamental Analysis

Forex Trading SystemWhen it comes to trading, whether you are dealing in options or forex trading, you will have two different options in terms of analysis. These options are technical analysis or fundamental analysis. There are many traders who have experienced success using either (or both) of these options; however, some experts believe that one is better than the other but in the technical vs. fundamental debate you will find opinion fairly equally split between the two. In this article it is fundamental analysis that I wish to examine in greater detail.

What is Fundamental Analysis?

According to Investopedia fundamental analysis is the evaluation of a security by trying to measure its value by taking into account related financial , economic and other factors. For example, in forex trading the security in question might be a particular currency and traders would perform a continual analysis of relevant information about that country in order to determine its currency’s intrinsic value. Some of the key indicators that would be examined during fundamental analysis in this case might include:

  • Interest Rates – interest rates are the driving force behind any currency and as a result they are examined closely by traders.
  • Gross Domestic Product (GDP) – this is a good indication of the overall economic health of a nation. If the GDP declines below expectations the value of currency will also fall.
  • Inflation – inflation is bad news for the economy. It is usual to expect an inflation rate of 2 to 3 percent, but anything above this then the currency of that country will also rise.
  • Unemployment Figures – economic growth in any country is driven by the people, especially the workforce. This means that if unemployment levels increase interest rates are cut which can devalue the currency.
  • Consumer Demand – as noted above, people are the backbone of a country’s economy. This means that a healthy economy requires a healthy level of consumer demand. When consumers are looking to spend money the economy grows and the value of currency grow with it.

Fundamental Analysis And Options Trading

payroll_functionsFundamental analysis is not just for forex trading, it can also be applied to options trading. Like with currency, there are a huge number of factors which can have an impact on the market price regardless of what you are trading in. There are also a number of different ways to source this information. Fundamental analysis means taking a lose look at all of this information in order to predict market trends. The more information you have, the more accurate your prediction will be.

The rules of fundamental analysis are not set in stone, in fact traders using this method are often considered to be ‘discretionary’. The analysis of this type of information is highly subjective and different traders will interpret it very differently. This is why you should not go to another trader for his or her advice, but instead make your own decisions when determining how the market will react to the latest company shake up or natural disaster.

Traders will find that their ability to predict market trends should improve over time as they learn more about the market and gain experience in fundamental analysis.

Liam Ball is a frequent contributor to finance blogs all around the globe. He enjoys options trading with epsilonoptions.com and finds that the more he learns the more successful he is.