Currencies are the building blocks in Forex trading. As the global economy affects the exchange rates of currency, the market becomes volatile. However, you can use the same data offered by global economy movement to determine possible carry trades and capital flows for the month or year. Since enough data is given to be able to make a sound prediction, fundamental analysis is then perfect to use in Forex trading.
What is Fundamental Analysis?
Fundamental analysis is the examination of a business’s income statement, including earnings, assets, and liabilities. The result is used to determine the business’s standing in the market. When it comes to Forex, fundamental analysis is used to analyze the economy and other factors like GDP, manufacturing, employment, etc. It serves as the foundation in determining whether a stock is overvalued or undervalued.
Fundamental analysis tries to answer whether a company is competitive enough and if the industry it belongs to is growing or sinking. The basic concept is that if a company is fundamentally strong, then its shares are likely to go up in time. On the other hand, if a company has weak fundamentals, its stock price is likely to fall.
Why you need to use Fundamental Analysis?
Fundamental analysis is a reliable method in determining whether you should invest in a company or not. If you invest in a stock that has high possibility of going up, then you can ensure that you’ll gain profits.
Let’s look at the other picture. What happens if you put your money in a company without prior analysis? You are prone to high risk of losing. It’s like going into battle without knowing who your opponent is. If you want to succeed, you must take into account several things and use several strategies, including Fundamental Analysis, to your advantage.
Since Fundamental Analysis digs deep into the records, it is very useful to those who are planning on becoming long-time investors.
How to conduct Fundamental Analysis?
First of all, you have to understand that Fundamental Analysis revolves around analyzing numbers, specifically financial statements. These are usually affected by the laws and economic status of the country where the company is registered. Hence, you must research not only focus on the company itself but also on the country’s financial conditions and the dynamics that runs its economic development.
Once done, follow central bank statistics and fundamental news and use the data they provide in identifying which company is benefitting more from the current economy. Then, you can place your trades in those companies. This gives you greater chance of gaining profits.
How to apply Fundamental Analysis in Forex trading?
In Forex trading, whether it’s online like in CMC Markets or not, use your analysis of the global market’s health in determining market volatility, cross-border capital flows, carry trades, and so on. Once you’ve ensured that the country’s economic policies are healthy and reliable, decide whether investors, issuers, and intermediaries support them. If these market actors are against the set policy, then it’s better if you don’t buy the country’s currency. If otherwise, then it’s a good trading ground for you.