Let’s study what the Forex fundamental analysis is and how to use it in trading stocks and currency pairs.
What is fundamental analysis?
Before delving into the key elements of fundamental analysis, let us define the meaning of this word combination. Fundamental analysis is a study of the underlying factors that drive the market. This type of analysis is based on economic data, news events, and earnings reports.
Forex fundamental analysis
When a person trades Forex, he/she takes into consideration the dynamics of such economic indicators as inflation, interest rates, retail sales, jobs data, etc. All these economic reports are gathered in the economic calendar. News events include announcements of central bank governors; discussions of intercountry issues, for example, Brexit; replacements of government members. While some news can be predicted, others cannot – in this case, traders have to adjust to the new situation.
How to trade on news?
A challenge of fundamental analysis is to learn how to interpret changes in economic data and speeches of authorities. We will explain to you in more detail how the changes in economic data influence currency exchange rates in the next lesson. Remember though the key logical rule below.
- A domestic currency will rise if a country’s economic data improves and beats expectations.
- In opposite, if a country’s economic data comes out worse than expected, a domestic currency will fall.
As you trade currency pairs in which two currencies are involved, you use fundamental analysis to compare the economies of these countries. Whichever is stronger, the currency of that will rise versus the other one.
Stock fundamental analysis
When a person trades stocks, he/she bases his/her bets on earnings reports, which reveal how the company performed in the previous quarter. There are 4 earnings seasons a year, each one lasts for several weeks. Earnings are released during the month which follows the quarter (January, April, July, and October). This is when you should check the earnings calendar to learn when to trade.
Earnings releases represent the perfect opportunity to diversify from currencies into stocks and benefit from the big price moves that will occur ahead, during the day, and after the earnings release. The price can jump or fall by tens of percent after these releases, so traders can profit during a very short time.
How to trade on earnings reports?
- If the financial report (quarterly or annual) shows that the company increased profit or sales, investors get interested in it. Demand for the company’s stocks rises and their price goes up.
- If the company announces that its profit has declined, its stocks fall on the news.
The good news for FBS traders is that they can trade stocks making both buy and sell trades. Thus, traders have a chance to profit in case of either outcome.
There are thousands of factors that influence the exchange rates, so many that you may become dizzy struggling to analyze all of them at once. But don’t worry! We are always ready to help you. We do hope that with our tutorial, you will easily learn everything you need to know about Forex fundamental analysis. OK, we won’t trouble you with loose talk anymore. Let us get down to business.
We told you the bare truth having said there are a great many economic indicators that may influence the currency’s price. Fortunately for us, the list can be narrowed down to a few key indicators (they are dubbed as the “market movers”). For the sake of simplicity, we decided to split all of them into four groups. Look at them in the next lesson Fundamental factors.
Follow economic releases, earnings reports, and financial news every day!
Webinar: fundamental analysis in stock and Forex trading