FUNDAMENTAL ANALYSIS

Equities or commodities are valued by their intrinsic strength on an absolute basis, while foreign exchange is valued by the relative strength of one currency with respect to another. Some of the economic indicators that fall into the realm of fundamental analysis are interest rates, employment reports, and inflation reports, among others.

WHAT IS FUNDAMENTAL ANALYSIS?

Trading on the fundamentals – also referred to as trading the news – is the study of news events and economic statistics to determine trading opportunities. Referred to as fundamentalists, these traders pay close attention to changes in economic indicators such as interest rates, employment rates, and inflation.

APPROACHES TO FUNDAMENTAL ANALYSIS

Forex and CFD prices are impacted by macro and micro-economic data, geo-political events and their linkages. These factors may include for example, GDP growth rates, potentially disruptive geopolitical events, employment statistics, interest rates, and balance of trade reports among others.

TOP DOWN ANALYSIS

Begins by analyzing broad brush macroeconomic factors and aggregates of data working downwards narrowing and refining the search to include only those currency pairs that present a profit potential.

BOTTOM-UP ANALYSIS

Conversely, this type of analysis starts with analyzing the currency pair working upwards to aggregate macroeconomic information.

BALANCE OF TRADE AND INTEREST RATES

These factors are key drivers for currencies. If a country has a trade surplus this implies there is a high demand for its goods and services, consequently a greater demand for its currency thus driving up relative value. Similarly, higher relative interest rates lead to cash inflows, thus driving up the value of a currency.

THE FORCES DRIVING DEMAND AND SUPPLY

These have a significant impact on the valuation of commodities. For example, a growth of international conflict may result in increased demand for nickel, which is used in armaments and ammunition manufacturing driving up prices.

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TRADING ON FUNDAMENTALS

Fundamental analysis examines key drivers such as macro and micro economic data, and geopolitical events.