Fundamental Analysis in Practice

Published:21 September 2018 Updated:4 January 2024

Despite the fact that in the daily binary options trading or Forex trading Technical analysis is indispensable (video), you should never forget the fact that when you analyze the market you should also know the external factors controlling the price. Against this background, today we will look at what fundamental analysis is and how to use its principles in practice in trading currency pairs.


So, let’s start with the fact that the market is “ruled” by a huge number of economic and financial factors that shape the macroeconomic environment in any country. All you have to do is understand the importance of macroeconomic news and be able to use it in practice.

 

Foreign exchange market news

The basic “chip” of this type of analysis is news publications and the opportunity to trade on them. You all know that the publication of important statistics provokes the activity of players at the exchange – the price makes impulsive jumps in one direction and this movement can last for quite a long time. But why does it happen? Let’s explain.

In fundamental analysis, the various indicators that make up the entire economy of a state matter. These can be various economic indicators of states, capital flows, and, of course, changes in interest rate Central banks. What matters is not even the macroeconomic statistics in numbers, but the reaction it generates among investors and the market itself on a global scale. Some news can be positive for investors, while others can be negative and this provokes their corresponding behavior on the market – buying or selling an asset.

But the truth is also that fundamental analysis itself cannot guarantee you an accurate prediction of the market situation. There are always a number of sudden factors that no one can predict. Nevertheless, having received a set of economic data, you will be able to outline a certain corridor in which the price will move, and already to correct it with the help of technical analysis. The only nuance – you need to analyze the markets of two currencies in a pair.

For example, take the currency pair AUD/USD. These are two different countries, with different Central Banks and key rates, as well as different economic indicators. Your goal is to understand why the value of the Australian dollar can rise or fall relative to the U.S. dollar.

 

Key rate

The most important indicator in fundamental analysis is the key rate, changes in which have a huge impact on the market. One of the main tasks of the Central Bank is to control inflation. If inflation is high in the country, the bank tries to curb it, and it does this by raising the key rate. An increase in the key rate slows the economy, while a decrease in the key rate helps the economy grow.

Why pay attention to the key rate when analyzing the market? The fact is that it determines the rate of the currency of a country. For example, an increase in the key rate by the U.S. Central Bank contributes to the strengthening of the dollar, that is, on the AUD/USD chart we will see that the AUD falls against the USD, while a rate cut will cause decline of the Australian dollar. In the example below, which is taken from the company’s terminal Binomo (bonus 100% to deposit by promo code REVIEWEEK100Activate), we can see how after the news of the increase in the interest rate by the Central Bank of Australia, there is an increase in the exchange rate of AUD against USD.

Also significant news publications, which may greatly affect the fluctuations of the currency pair quotes, are the statements of the heads of the Central Bank – the slightest notice of a definite weakening or strengthening of the currency can provoke a storm of trades in the market.

All news related to changes in economic indicators in the country have a strong influence on fluctuations in exchange rates of currency pairs. For example, index of business activity in the country or the volume of retail sales, unemployment and quarterly reports of different sectors of the national economy. All this news can also provoke active movement in the market, but the key factor in the market is still the key rate.

 

To summarize…

So, in order to make sure that currency pair quotes movement is not a big and sudden surprise for you, you should always follow all the important news, which are related to the Central Bank:

  • at the key rates
  • utterances of the heads and deputies of the Central Bank
  • interviews with bankers
  • economic growth forecasts
  • new injections into the country’s economy
  • on the commodity turnover and trade balance of the states

Tracking such news, you will always know for sure, what trend will be present in the market in the near future, and therefore make more accurate forecasts in the transactions.

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