While some devoted believers in technical analysis claim that all information available to the market is already included in the price dynamic, the reality is that it is true only in retrospection. Yes, the information that traders receive from all sources is indeed reflected in the market history, but it does not mean that the market reacts to all events in the same manner. Many factors affect how people buy and sell meaning that prices are often moving without any particular reason or may not react to a significant news story. What you should know about online trading ?
What is fundamental analysis?
The main theory of analytical work in financial markets is still fundamental analysis which is a method involving a breakdown of previous, current, and future economic events that could affect the market situation or any asset.
The Forex market works primarily with four types of assets:
- Currencies that are represented by pairs of national fiat currencies that are pitted against each other;
- Stocks and indices which can be traded via CFD contracts working similarly to futures;
- Cryptocurrency futures and other derivatives (options) that have been gaining popularity recently;
- Commodities like gold, silver, oil & gas, agricultural goods, and more via futures.
Among these four categories, only cryptocurrencies are not directly tied to the global economy, but the research of the historical data indicates that the crypto market moves in tandem with the stock market, especially NYSE. BTC was often compared to US indices like NASDAQ. This correlation is quite easy to explain: two main stablecoins are pegged by the US dollar meaning that they are subjected to the same risks as the US fiat currency.
The fundamental analysis approaches market research from principles that have been used to forecast prices since the beginning of time. The main goal of this type of analysis is to identify the fair market value of any given asset by looking into various sources of information and trying to identify assets that are trading either above or below the real market value.
If an asset is traded above its true evaluation, retail traders enter short market positions and wait for the inevitable crash. If an asset is undervalued, investors are entering long positions.
How to find stocks that are undervalued?
There are many sources of information a contemporary retail trader can employ to fish for valuable insights. However, understanding how various sectors of the economy interconnect and which economic processes can affect an asset are important skills that usually require some training in economics and a background in specific industries.
Retail traders that do not focus on technical analysis often make investment decisions based on their experience with the industry they are investing in. For example, someone who worked in retail and understands how merchants deal with various managerial and monetary issues will often focus on publicly traded companies like Walmart or Seven Eleven as well as companies that supply these retailers.
One of many instruments that FX traders use when trying to analyze price dynamics is an economic calendar that shows upcoming events in the global and national economies.
Here are some examples of what kinds of events you can monitor using the calendar:
- Reports from official agencies that regulate industrial sectors in their respective countries;
- Global events that may affect the evaluation of certain companies and commodities;
- News from industries that may have a spanning effect on hundreds of companies;
- Forecasts and breakdowns for statistical data from official governmental and international sources.
Since the driving asset in the whole Forex industry is the US dollar, often news from the FTC, SEC, CDC (Chamber of Digital Commerce), the US treasury, and other agencies dramatically affect the market.
While technical analysis is hugely important for any contemporary trader, it is important to remember that fundamental analysis is still one of the most important skills to learn for a Forex trader. Understanding how to read news articles from an investor’s perspective is crucial for any person engaging with financial markets. Read more about forex and crypto news.