Fundamental Analysis

March 5, 2013 Posted in Uncategorized by No Comments

Introduction to Fundamental Analysis

fundamental analysisThe news is what moves the markets. But why is this the case? An understanding of why the news moves the markets is the basis of fundamental analysis as a form of trading.

The news releases are simply political and economic reports that tell the financial markets about how well a country’s economy is doing in certain areas and what this will mean for other countries of the world and the citizens, businessmen and the entire financial industry in the affected countries. The world is now a very global village and if one country sneezes, several others will catch a cold. We saw this displayed very clearly during the global financial crisis where a sector of the US economy crumbled and dragged just about every company in every country with it. Many countries are still struggling to recover. This simply underscores why news trading and fundamental analysis are so important to today’s trader.

Why is there such a global connection between countries to the extent that traders all over the world focus on a certain news release or the other from one country? To understand this better, it is good to look at the role that certain countries have assumed in today’s global politics and economics.

The US effectively became the world’s trade reference country after the Bretton-Woods conference of 1944 which made the US Dollar effectively the global reference currency. Till date, international transactions and trade are all denominated in the US Dollar. The price of crude oil and all global commodities are priced in US Dollars. Many countries depend on the US for trade, aid and political support. The US has assumed global leadership on the economic and political stage. That is why news releases from the US touch virtually every country on this planet.

China is another emerging global force, and is a major trade partner to the entire continent of Asia, Australia, New Zealand, etc. The currencies of Australia and New Zealand are part of the 7 major world currencies, and their trade with China constitutes a large part of their GDP. China’s buying power and consumption of raw materials for its rapid industrialization is practically keeping food on the plate of many countries. That is why China’s performance is monitored by the global markets.

There are other countries which play pivotal roles: Germany in the Eurozone, South Africa in the African region, Brazil and the other BRICS states of Russia and India. News out of these countries have implications on the global commodity markets.

These periodic announcements that constitute the news releases out of these key countries will impact the world economy and depending on the numbers, traders will assume a negative or positive bias on the currency of the announcing country, which in turn causes the markets to assume a bias on the currencies of economies tied to the performance of the announcing country. Traders will then either increase their holdings in certain assets or they may offload those holdings and move to safer havens.

Some news are more important than others. It is also possible for a news item which has historically been of little importance to make the transition to achieve high-impact status. Similarly, high-impact news today can become of no impact a year or two down the road. For instance, the housing data which had little use in 2000 are now huge data in the US as a result of the role of that sector in the global financial crisis of 2008. News items such as the GDP of countries like Spain and Greece which were practically valueless four years ago are now highly watched items as a result of the sovereign debt crisis in both countries. For these countries, the GDP is now an indicator of the health of these economies and so until the sovereign debt crisis resolves, the GDP of those 2 nations will have a profound market effect on the Euro.

The following news items are highly important:

1)    Employment Data (including jobless or unemployment claims).

2)    Manufacturing Data.

3)    Retail sales reports.

4)    Consumer sentiment reports

5)    Gross Domestic Product (GDP).

6)    Inflation data.

7)    Housing data.

All these data have one form of effect or another in the financial markets. If you are trading binary options with fundamental analysis, it is important you understand the relationships outlined above and know what asset to trade for every news item worth trading. It is only when this is done that fundamental analysis will serve as a vital component of your trading arsenal.

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