• Category: Beginner

Understanding the Basics of Fundamental Analysis

In binary trading, investors use technical and fundamental analysis to determine the direction of the price movement of an asset. Here, you will learn the basics of fundamental analysis.

Understanding the Basics of Fundamental Analysis

Fundamental analysis entails studying economic factors that influence the price movement of a particular asset. These factors could be as local as activities in a company or as global as the financial crisis. The interconnected nature of the world means local and global events will impact differently on the underlying assets.

It is not feasible to keep up with all the events and how they impact on all tradable assets available. The rule of thumb is to focus on just a handful of assets to keep track of how they perform against internal and external factors.

So, what types of events impact on the price movement of assets?

Politics, natural disasters, global financial sentiments, a country’s gross domestic product, level of unemployment, and interest rates among other factors. Generally, positive news about an asset creates a bullish environment while negative news creates a bearish trading environment for that particular asset.

As mentioned earlier, it is worth noting that different asset classes are affected differently by the prevailing economic events.

For example:

If you are trading Indices, any news or events pertaining to the economy of that particular index will impact on the price movement. Therefore the USDX or the US Dollar Index will be impacted by the performance of the US dollar.

When trading commodities, macroeconomic factors of demand and supply, natural disasters and local and world politics impact on the price of the underlying asset.

Currencies are largely affected by the performance of the US dollar because all currencies are presently traded against the USD. Other than the performance of the USD you will also need to look at local factors as inflation and interest rates to determine the price movement of a particular asset.

Lastly, the price of stocks is generally impacted by internal events and how the markets respond to these events.

Fundamental analysis is not a CALL or PUT indicator. You should only use the data to get a picture of how the asset prices will trend in future.

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