Principles of Fundamental Analysis

Analytical instruments, used by traders to foresee further market behavior and as a result to get prepared for further actions on the way to getting profit, may be classified into four main types. These types include technical, wave, computer and fundamental analyses. In this article you will get acquainted with basic principles of fundamental one.

The main idea of this analytical approach is tracking the news primarily of political and economic nature capable to impact financial market behavior. Economic news may include reports on major world economic indexes, such as GDP report, jobless rate, inflation rate, different manufacturing indexes. Interest rates of the world most influential central banks also play important role in the process of price formation as they appear to be the main mechanism to handle inflation. The higher a refinancing rate is, the more attractive the currency of this country seems to be for investors. There are, however, about 30 major macroeconomic indicators of high influence on financial markets. Price formation may also depend on other factors such as natural disasters, wars etc.

Economic Calendar
Forex economic calendar is a necessary instrument to stay informed about all important news releases, speeches and reports. This calendar should include results of central bank board meetings, reports of all possible committees and departments, corporate profit reports. Any of the abovementioned events may pave the way for further price actions in both directions. Fundamental analysis implies grounded evaluation of these events, prediction on how a certain report will affect the market. Following the news and making right conclusions are necessary components of the trading system of every trader. Underestimation of fundamental principles must be eliminated as their influence is significant in short term outlook as well as in long term one.

How to Use News in Your Trading Strategy
There are two types of probable trader`s behavior in response to the news. The first possible way is to take the news into account. For example, having understood the nature of current trend on the market and its reasons and possible long term circumstances a trader may make a decision to refuse to trade against the trend.

The second way is to conduct trading basing on Forex calendar or Forex market news. For example, if you are aware of a certain report coming soon and it will probably bring unexpected result, you may place in advance pending orders in both directions at 20-30 pips from the current price. If the news pushes the market up, your order will bring you profit in case when this movement lasts for a certain period of time. However it depends on the nature of this report and on reaction of the market.

Here you will need to estimate importance of the news and predict reaction of the market. This way of trading requires detailed evaluation of possible profit and risk exposure. For instance, if you place stop loss at 30 pip level and the number of profitable transactions is 5 out of 10 (50 percent) you need to fix take profit not less than 30 pips in order to make your trading profitable.

Do not forget to take into account Forex economic calendar, to evaluate news and to estimate further response of the market.