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.

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 gives an date for listed companies quarterly earnings reports. 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.


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.