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New to FX - Fundamental Analysis

Fundamental Analysis

Fundamental Analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative- and technical analysis.

Fundamental Analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:

  • to conduct a company stock valuation and predict its probable price evolution,
  • to make a projection on its business performance,
  • to evaluate its management and make internal business decisions,
  • to calculate its credit risk.

More often than not, Fundamental Analysis is performed by investors rather than traders, because fundamentals might effect the underlyings only on a longer timeframe. While many agree that Fundamental Analysis is pretty much the opposite of Technical Analysis, it is very important in the Forex market to take both aspects into account while considering a longer term trade. Recent events and decisions made by governments (for example: Non-farm Employment Change) or Central and National Banks (for example: changing the basic interest rate of a country) can affect a given currency pair in a great way and one should not disregard them. Many traders have had great success by timing entry and exit points according to Technical Analysis, but selecting the underlying itself with fundamental analysis. Usually for short term trade techniques like scalping this type of analysis is of no importance.

Please visit our REAL TIME FUNDAMENTALS page where you can see and read about these indicators of different country's economies. Please click on the advanced button to select the countries of your interest.