What is fundamental analysis?

This is the Fundamental Analysis Explained:

• Fundamental analysis assumes that all assets should be appraised at their actual, fair market value. As a result, investors are often asking themselves, “Does the price make sense for this asset?” The reasoning is simple: if security seems cheap, it probably is. Likewise, the sell button makes sense if specific markets continue to be overpriced.
• Conditions at the base are dynamic and constantly changing. For instance, if the firm has strong financial results, investors may bid up the stock price. Similarly, a country’s stock market and currency should climb if its economy thrives and incoming economic data is better than predicted. Conversely, negative news about specific firms or nations should be considered a drag on asset values. The phrase “fundamental analysis” is often connected to the financial world, namely the stock market. However, it is not limited to that industry. Indexes, commodities, and currency markets are all profoundly influenced by fundamentals.

Fundamentals and stock indices

• The performance of stock indices is influenced by the broader economy and the specifics of the companies that make up such indices. As a result, fundamental traders often look to economic prints to gauge the health of a country’s economy. For example, companies may make more money if the economy is growing. In these conditions, the prognosis for businesses and the economy improves, leading to higher stock prices.
• Yet, rising inflation is seen to be bad for stock markets. The rationale is elementary: if stock prices increase too rapidly, central banks could raise interest rates, and if interest rates rise, investors have other options than equities.

Fundamentals and commodities

• Fundamental analysis for commodities is predicated on manipulating supply and demand up or down. That’s why essential statistics on worldwide demand for commodities, as well as updates on supply and stockpiles, are continuously analyzed by traders. Two simple equations accurately illustrate the fundamental dynamic that determines commodity prices:
• If consumer demand exceeds available supply, prices will rise.
• Supply meets demand; prices fall.
• Weather, manufacturing strikes, technological advancements, and even governmental policies may profoundly impact the availability of certain goods. When it comes to oil prices, the OPEC cartel affects supply. In addition, market participants use stockpile data since it provides clues about the strength of demand. One factor that might be detrimental to the price of a product is an unexpectedly significant rise in stockpiles, which may signal sluggish demand.
• Moreover, the U.S. dollar is the standard for pricing essential commodities. In general, as the U.S. dollar rises, commodity prices fall. Commodity prices are sensitive to U.S. interest rate movements since a stronger currency is often associated with higher rates.

Fundamentals and the FX market

Currency exchange rates are affected by news about the economy. The response of local currencies to economic data may be summarized in two simple examples:

• Employment expansion leads to robust retail sales, which leads to rising inflation and, ultimately, higher interest rates, which benefit the currency. Conversely, a decline in employment leads to weak retail sales, falling inflation, and adverse effects on the currency.
• Under the first scenario, rising interest rates are a positive sign for the value of a currency since they signal an expanding economy.
• Under the second scenario, lower interest rates are likely given the possibility of sluggish economic growth or a recession.
• Remember that while working with foreign exchange, you always compare one currency to another. So, for example, even if Japanese economic data is vital, the dollar might rise against the yen if similar data from the United States is much more robust (USDJPY increase). As a result, you should seek the most and least stable currencies.

Key economic reports to watch

• Traders place more weight on the dollar when the non-farm payrolls (NFP) report for the preceding month is more significant than predicted (USD in this case). This is because other nations maintain different employment statistics.
• Raising interest rates by the Fed is considered suitable for the currency (USD in this case) while reducing them is considered evil.
• The market often views inflation reports favorably since they indicate that the central bank may raise interest rates to keep inflation in check.
• GDP statistics: growing economic activity is associated with increased corporate profits and personal incomes, which can boost stock market indexes and strengthen currencies.
• Sales at retail establishments indicate economic growth; if this indicator is high, GDP growth estimates may be revised upward, which would be bullish for the currency and the stock market.
• Industrial production – gives information on the change in the output volume in the industrial sector, which is a part of the GDP report. High industrial output is favorable for the currency and the local stock market.
• Feedback from the manufacturing sector through a PMI survey. The currency and stock market tend to do better when the reading is over 50, but investors should also consider the velocity of change (rising PMI taken as positive).
• Information gathered from business surveys about the quality of services provided. Similarly to manufacturing PMI, over 50 is considered favorable for the currency and the stock market, while a figure below 50 is considered unfavorable. The pace of change is essential as well.

Examples of trades based on fundamental analysis

Example 1 – US100

• A trader thinks U.S. gross domestic product statistics will be more vital than forecast.
• Reaction: After the announcement, U.S. indexes are likely to climb.
• Meaning: a reflection of confidence in the economy’s future by investors.
• A trader chooses to buy into the US100 CFD, which tracks the price movement of the 100 most significant U.S. technology stocks traded on the organized market. To initiate a long position, choose the desired volume and then click the green button in the top left corner of the chart. This will result in immediate execution, the fastest possible trade method. The short-selling entry price is always shown in green and always at that price.

• Please keep in mind that the information provided is based on historical performance and does not guarantee future results.
• A “Click & Trade” module (shown by the arrow) is already integrated into this site, so all you have to do is click the green button to acquire a long position in US$100.

Example 2 – DE30

• Example: a trader has a hunch that Germany’s employment figures will disappoint. As a result, stock prices in Germany are likely to drop.
• The “shape” of the economy may often be inferred from the state of the labor market.
• A trader chooses to short DE30, a contract for difference (CFD) for an index tracking the 30 most significant German equities traded on the organized market. If their prediction that stock prices would drop in response to the revelation of labor market data is correct, the bet will turn a profit. Yet if they’re incorrect, the bet might be a loser.

• Please keep in mind that the information provided is based on historical performance and does not guarantee future results.
• The “Market Watch” section of the xStation 5 trading software is where traders may initiate short trades. To do this, choose the “sell” option. On the other hand, if you think specific indices will go up, you may click the “purchase” button. Taking any of these stances lets you speculate similarly on the price increase or decrease of several other financial instruments.

Example 3 – Oil

• In this example, a trader worries that oil stocks in the United States may increase more than predicted, signaling a drop in demand.
• As a result, the commodities markets ought to see this as bad news for oil prices.
• The result suggests reduced oil demand, which is why it was recorded.
• A trader opens a short position in oil. WTI in the hopes that WTI crude oil prices would fall.

• Please keep in mind that the information provided is based on historical performance and does not guarantee future results.
• To short OIL.WTI, place an order by clicking the “sell” option. You may trade CFDs without owning any oil; all you have to do is wager that the oil price will go down.

Example 4 – Gold

• For example, the Federal Reserve increased interest rates because inflation was more significant than predicted.
• The reaction is a drop in gold prices and a rise in the value of the U.S. dollar.
• Gold prices tend to decline as U.S. interest rates rise and the dollar strengthens (and other significant commodities).

Please keep in mind that the information provided is based on historical performance and does not guarantee future results.

Example 5 – EURUSD

• A case in point: the United States saw a faster-than-expected increase in inflation from 3% to 4%.
• As a result, the US dollar rose in value, sending the EUR/USD tumbling from 1.1880 to 1.1830.
• Explanation: Greater inflation raises the possibility that the Federal Reserve may raise interest rates, which is generally good for the dollar’s value (USD, in this case).

Please keep in mind that the information provided is based on historical performance and does not guarantee future results.

Summary

• To sum up, asset prices are determined mainly by fundamentals, which are affected by various economic indicators. Thus, traders pay close attention to economic calendars to incorporate this information into their trading strategies.
• Although fundamentals are essential for any thorough market research, it is crucial to remember that there are many other considerations before making any final calls and that fundamentals alone cannot ensure any specific market movement.
• Contracts for difference (CFDs) are leveraged financial transactions that may cause sudden financial ruin if you’re not careful. When trading CFDs with this supplier, 77% of retail investor accounts end up in the red. You should carefully evaluate if you are willing to incur the high risk of losing money and whether or not you understand how CFDs operate.
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