Fundamental Analysis tool
Fundamental analysis is a method that attempts to predict the intrinsic value of an investment. It is based on the theory that the market price of an asset tends to move towards its ‘real value’ or ‘intrinsic value’.
Fundamental analysis is a method of analysis by studying carefully and thoroughly every aspect of a company’s operations. Or in broad outline is to do an analytical approach through the economic conditions of a company or country.
Most of these fundamental analyzes focus on financial reports provided by companies or countries. It depends on the context of asset trading that you do. If the stock analysis certainly studies the financial condition of the company, but if the forex analysis then you study the economic conditions of the country concerned.
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Fundamental analysis forex
Fundamental analysis in Forex entails predicting the price valuation of a currency and its market trends by analyzing current economic conditions. Government policy and societal factors within a business cycle framework. Forex Traders gauge a country’s economic state by examining macroeconomic indicators covering:
- Interest Rates Announcement
- Gross Domestic Product (GDP)
- Consumer Price Index (Inflation) and Spending Indicators
- Employment Indicators
- Retail Trade and Consumer Confidence
- Balance of Trade Surplus or Deficit
- Government Fiscal and Monetary Policy
Advantage Fundamental Analysis
The advantage of forex fundamental analysis is more in knowing the economic conditions in a country so that it is more profitable in the long run. Fundamental analysis will require some data such as the performance of money from cash flow statements, balance sheets, income statements, etc.
For a trader who really wants to know the economic condition of a country. Then fundamental analysis can be the right choice. In detail, some of the advantages of fundamental analysis are as follows.
The most basic analysis
Actually, fundamental analysis is used first for stock analysis, this is a basic analysis before many people use technical analysis. As financial markets change, many people use fundamental analysis for forex trading.
The basic analysis is the same as stocks, the only difference being the scope, where stocks are companies and forex is the state.
Suitable for Long Term
Fundamental analysis is believed to have a long-term effect. So even though in the short term the price seems to go against the direction of the fundamental analysis line, but in the end, it will move again in accordance with the country’s economic conditions.
So for example in a few quarters, the country’s economy has decreased, the impact on the currency will weaken in the long run.
But it should be noted that the forex market is unique, sometimes you will feel odd because economic data has deteriorated but the currency has strengthened.
Remember the forex market participants are not only small players but also hedge funds who also have an interest in making profits in the short term.
The disadvantage of Fundamental Analysis
Too many macroeconomic indicators and indicator can confuse novice investors
Macroeconomic indicators are statistics that indicate the current status of the economy of a state depending on a particular area of the economy (industry, labor market, trade, etc.).
Capital One Forex provides an Economic Calendar for the dates of critical fundamental announcements and events. When properly used, these indicators can be an invaluable resource for any Forex trader. If we summarized there are some disadvantages of fundamental analysis.
It takes a long time in Data Collection
Unlike technical analysis that deals directly with indicators, fundamental analysis requires considerable time to collect data.
Because you have to look for sources of economic news references globally, even though you have subscribed to news portals, but sometimes some economic news is contradictory and out of sync so as to confuse you.
Must be observant and up to date
Choosing fundamental analysis you must be observant to see what news can affect the market. Because not all news has an effect on price.
You must not miss the slightest news because it will affect the moment for entry or close market. On the other hand, those of you who use the system or choose fundamental analysis when you decide to enter the market. You must see in advance how the market position.
Interest Rates Announcement
Interest rates play the most important role in moving the prices of currencies in the foreign exchange market. As the institutions that set interest rates, central banks are therefore the most influential actors.
Interest rates dictate flows of investment. Since currencies are the representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another.
When central banks change interest rates they cause the forex market to experience movement and volatility.
Gross Domestic Product (GDP)
The GDP is the broadest measure of a country’s economy, and it represents the total market value of all goods and services produced in a country during a given year.
Since the GDP figure itself is often considered a lagging indicator, most traders focus on the two reports that are issued in the months before the final GDP figures: the advance report and the preliminary report. Significant revisions between these reports can cause considerable volatility.
Consumer Price Index
The Consumer Price Index (CPI) is probably the most crucial indicator of inflation. It represents changes in the level of retail prices for the basic consumer basket.
Inflation is tied directly to the purchasing power of a currency within its borders and affects its standing on the international markets.
If the economy develops in normal conditions, the increase in CPI can lead to an increase in basic interest rates. This, in turn, leads to an increase in the attractiveness of a currency.
Employment indicators reflect the overall health of an economy or business cycle. In order to understand how an economy is functioning. it is important to know how many jobs are being created or destructed.
What percentage of the workforce is actively working, and how many new people are claiming unemployment. For inflation measurement, it is also important to monitor the speed at which wages are growing.
The retail sales indicator is released on a monthly basis and is important to the foreign exchange trader because it shows the overall strength of consumer spending and the success of retail stores.
The report is particularly useful because it is a timely indicator of broad consumer spending patterns that is adjusted for seasonal variables. It can be used to predict the performance of more important lagging indicators and to assess the immediate direction of an economy.
Balance of Payments
The Balance of Payments represents the ratio between the number of payments received from abroad and the number of payments going abroad. In other words, it shows the total foreign trade operations, trade balance, and balance between export and import, transfer payments. If the coming payment exceeds payments to other countries and international organizations the balance of payments is positive. The surplus is a favorable factor for the growth of the national currency.
Government Fiscal and Monetary policy
Stabilization of the economy (e.g., full employment, control of inflation, and an equitable balance of payments). This is one of the goals that governments attempt to achieve through the manipulation of fiscal and monetary policies. Fiscal policy relates to taxes and expenditures, monetary policy to financial markets. And the supply of credit, money, and other financial assets.
Fundamental analysis tools
When you do fundamental analysis, there are benefits to using a fundamental analysis tool that can help you get a variety of fundamental information. Here are the fundamental tools you can try.
You can search for free in a month if it does not exceed 200 searches. This is a good tool for gathering financial information quickly in various companies.
This fundamental analysis tool uses spreadsheets (CSV) for information on company revenues, operating costs, products, subsidiaries, key faculty members, and more.
There are various tools there, you can use what you need, this is a community of experts in financial markets, you can follow experts who share trading ideas.
Not only the stock and forex markets, even the cryptocurrency market also gets the same portion here. You can also share trading ideas or unique trading charts from trading views.
Simply Wall Street is a free open source project. This tool can help you make better decisions as an investor. This will take all the complicated ratios and formulas and simplify them as easily as digesting infographics.
This will notify you in just a few seconds to find dividend payments or track the historical performance of an asset.
If you feel challenged by investing in a new startup, then you can use Crunchbase to get all kinds of info about funding, teams, and more, so you won’t be blind.
FunSeeder is also completely free for fundamental and technical analysis. You can obtain trade statistics, Monetization and Account management, extract effort, and mathematics from trading and manage portfolios.
There are many economic indicators and even more private reports to uses evaluate the fundamentals of forex. It’s important to take the time to not only look at the numbers but also understand what they mean and how they affect a nation’s economy.
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