Markets are moving. Basic overview of Fundamentals and how they influence trading and investing.

Updated: Nov 19, 2020


There are many approaches to trading or investing but mainly encompass the following.

• Fundamental Analysis

• Technical Analysis

• Sentimental Analysis

Each trader/investor develops their own style and it often ends up as a combination of all three. No one can say which is better only what they prefer. If there was a magic formular, we would all follow it.


https://www.insiderkk.com/post/investing-vs-trading-what-s-the-difference.


What is fundamental trading?

Fundamentals is a category that involves pretty much all news. Everything with economic indicators (GDP, Trade Balance, CPI, PPI, Inflation, NFP, Employment Rate). Central Bank decisions or any other social/political influences that can affect supply & demand. Obviously COVID19 & the US Election are predominant today.


The idea behind this is that you can analyse this data to make a considered decision of price movement of an asset/currency pair/stock etc.

For example: If the unemployment rate came in higher than expected, this means less people are employed so less money will be circulating in the country. Demand lower – predicted movement = Low.

You get a lagging indicator, slow down in economy means less investment, effecting housing development or business growth as an example. Very pertinent today.

When one of these economic indicators are released there will be a movement according to their impact.

Meaning that if you predict it correctly, you will be able to make a profit by trading the correct asset/currency/stock/commodity.

How to keep track of economic data release, most Brokers will offer an easy to understand calendar, giving times and potential impact of each event.

Examples


https://www.etoro.com/investing/earnings-reports/ gives an date for listed companies quarterly earnings reports.


https://www.avatrade.com/trading-info/economic-calendar General daily update of data released.

When you are trading fundamentals, you either make a prediction or wait for the actual results to be released.

When investing, you generally wait for the results. You will either follow the country’s economy and make a prediction whether the result will be as expected or different and plan accordingly, or you’ll compare the forecast with the actual results once they’re released and make a decision then.

FUNDAMENTAL ANALYSIS

Interest Rates


‘A currency's interest rate is probably the biggest factor in determining the perceived value of a currency’.

Over the past 150 years, interest rates for the developed countries average about 5%, good for pensions and risk adverse investors, if inflation was below this. Big caveat, this is changing, since the banking crisis of 2008/9, interest rates are near zero for the developed Western economies.



Times They Are A-Changin' ok, I’m old.


Not anymore, the value of the perceived security and economic growth of a country has become more important, take a look at GBP/ JPY / USD, Brexit, COVID19,trade wars , still strong because investors perceive these economies as a stable ,geopolitical safe countries with future sustained growth. In contrast look at Turkish lira or, South African rand, unstable and volatile. Simply put even when developing countries offer higher Bond yields or interest rates, investors see them as risky. No I will not mention Greece.

For traders.

Interest rates simply make the forex world go round! In other words, the forex market is ruled by interest rates news. Therefore, your capital investment in Banks is worthless. I pay for keeping cash reserves now.

A currency's interest rate was probably the biggest factor in determining the perceived value of a currency.

However, geopolitical stability and future growth is becoming just as important.

However, knowing how a country's central bank sets its monetary policy, such as interest rate decisions, fiscal and monetary policy is crucial.

One of the biggest influences on a central bank's interest rate decision is price stability or inflation.

Inflation is a steady increase in the prices of goods and services. It's generally accepted that moderate inflation comes with economic growth.

However, too much inflation can harm an economy and that's why central banks are always keeping a watchful eye on inflation-related economic indicators, such as the CPI and PCE.


FUNDAMENTAL ANALYSIS


World Interest Rates

The World Interest Rates reflects the current interest rates of the main countries around the world, set by their respective Central Banks. Rates typically reflect the health of individual economies, as in a perfect

scenario, Central Banks tend to rise rates when the economy is growing and therefore instigate inflation.

Rate cuts on the other hand, are a way to stimulate a struggling economy. The table includes actual rates,

latest policy changes and the date of upcoming meetings/decisions, for the major ones.


FUNDAMENTAL ANALYSIS

Non – Farm Payroll


MEASURES: Change in the number of employed people during the previous month, excluding the farming industry.

FREQUENCY: Released monthly, usually on the first Friday after the month ends.

EFFECT: Actual > Forecast = Good for currency

NOTES: This is vital economic data released shortly after the month ends. The combination of importance and earliness makes for hefty market impacts.

TRADER: Job creation is an important leading indicator of consumer spending, which accounts for a majority of overall economic activity.


FUNDAMENTAL ANALYSIS

Unemployment Claims


MEASURES: The number of individuals who have filed for unemployment insurance for the first time during the past week.

FREQUENCY: Released weekly, 5 days after the week ends.

EFFECT: Actual < Forecast = Good for currency.

NOTES: This is the nation's earliest economic data. The market impact fluctuates from week to week - there tends to be more focus on the release when traders need to diagnose recent developments, or when the reading is at extremes.

TRADER: Although it's generally viewed as a lagging indicator, the number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labor-market conditions.


FUNDAMENTAL ANALYSIS

Manufacturing PMI


MEASURES: Level of a diffusion index based on surveyed purchasing managers in the manufacturing industry.

FREQUENCY: Released monthly, on the first business day after the month ends.

EFFECT: Actual > Forecast = Good for currency

NOTES: Above 50.0 indicates industry expansion, below indicates contraction.

TRADER: It's a leading indicator of economic health – businesses react quickly to market conditions, and their purchasing managers hold perhaps the most current and relevant insight into the company's view of the economy.


FUNDAMENTAL ANALYSIS


Trade Balance

MEASURES: Difference in value between imported and exported goods and services during the reported month.

FREQUENCY: Released monthly, about 35 days after the month ends.

EFFECT: Actual > Forecast = Good for currency.

NOTES: A positive number indicates that more goods and services were exported than imported.

TRADER: Export demand and currency demand are directly linked because foreigners must buy the domestic currency to pay for the nation's exports. Export demand also impacts production and prices at domestic manufacturers.


FUNDAMENTAL ANALYSIS

Producer Price Index (PPI)


MEASURES: Change in the price of finished goods and services sold by producers.

FREQUENCY: Released monthly, about 17 days after the month ends.

EFFECT: Actual > Forecast = Good for currency.

NOTES: Tends to have more impact when it's released ahead of the CPI data because the reports are significantly correlated.

TRADER: It's a leading indicator of consumer inflation – when producers charge more for goods and services the higher costs are usually passed on to the consumer.


FUNDAMENTAL ANALYSIS

Consumer Price Index (CPI)


MEASURES: Change in the price of goods and services purchased by consumers, excluding food and energy.

FREQUENCY: Released monthly, about 15 days after the month ends.

EFFECT: Actual > Forecast = Good for currency.

NOTES: Food and energy prices account for about a quarter of CPI, but they tend to be very volatile and distort the underlying trend. The FOMC usually pays the most attention to the Core data - so do traders.

TRADER: Consumer prices account for a majority of overall inflation. Inflation is important to currency valuation because rising prices lead the central bank to raise interest rates out of respect for their inflation containment mandate.


FUNDAMENTAL ANALYSIS

Existing Home Sales


MEASURES: Annualized number of residential buildings that were sold during the previous month, excluding new construction.

FREQUENCY: Released monthly, about 20 days after the month ends.

EFFECT: Actual > Forecast = Good for currency.

NOTES: While this is monthly data, it's reported in an annualized format (x12). Existing homes make up the majority of total sales and therefore tend to have more impact than New Home Sales.

TRADER: It's a leading indicator of economic health because the sale of a home triggers a wide-reaching ripple effect. For example, renovations are done by the new owners, a mortgage is sold by the financing bank, and brokers are paid to execute the transaction.


FUNDAMENTAL ANALYSIS

GDP



MEASURES: Annualized change in the inflation-adjusted value of all goods and services produced by the economy.

FREQUENCY: Released quarterly, about 30 days after the quarter ends.

EFFECT: Actual > Forecast = Good for currency.

NOTES: While this is q/q data, it's reported in an annualized format (quarterly change x4). There are 3 versions of GDP released a month apart – Advance, Preliminary, and Final. The Advance release is the earliest and thus tends to have the most impact.

TRADER: It's the broadest measure of economic activity and the primary gauge of the economy's health.


FUNDAMENTAL ANALYSIS



Group Meetings (G7/G20)

FREQUENCY: Tentative.

NOTES: G20 meetings are attended by finance ministers and central bankers from 20 industrialized nations including the G7 nations - Canada, Italy, France, Germany, Japan, the UK, and the

US. The meetings are closed to the press, but officials usually talk with reporters throughout the day, and a formal statement covering policy shifts and meeting objectives is released after the meetings have concluded.


TRADER: While it's not an institution, the G20 is an influential global policy-making body operating at the highest level, and their initiatives and policies can impact the currency markets.

The above are examples of how fundamentals influence assets in the short term and guide money managers investment decisions for the longer term. Knowing them often helps traders make quick decisions and potential decent returns.


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