Fundamental analysis is based on the analysis of economic and political news and its impact on exchange rates or asset prices. It includes a set of measures, the main purpose of which is to predict the behavior of prices and in this way help the Binary Options trader to make the right decisions. At its core,fundamental analysis considers the countries and companies related to the currencies or products that we are interested in. It can be quite difficult to conduct fundamental analysis, since the same factors can influence the situation in a variety of different ways and in turn the consequences may also differ.
This type of analysis is used more often by traders who prefer a long-term trade. The forecast is based on the current economic and political situation. Traders analyze economic news and are guided by events that may have a significant impact on the global or regional economy. It may be a change in the political life of the country or the general economic situation, reports on the dynamics of various indices, etc. Fundamental analysis takes into account everything, even the rumors and expectations.
This type of analysis is entirely dependent on external and internal factors affecting the global economy. And for effective analysis you need to see not only a direct relationship. For example, the strengthening or weakening of the economy of one of the leading countries can influence not only the quotation of its national currency, but also the exchange rate of its partner countries. This is also true about products and services.
Fundamental analysis includes consideration of the following list of parameters:
- Information about the interest rates of the central banks;
- Economic policy of the state;
- Political situation;
- Characteristics of economic growth;
- The trade balance figures;
- Inflation rates;
- The solvency of the state;
- Investor sentiment;
- Competitive products;
- Consumer sentiment;
- Situation of the real estate market;
- State of the labor market;
- Natural disasters;
- New product and service release;
- And other factors.
Here are the main categories that will make it easier for you to understand the fundamental analysis concept more in depth:
Besides the political and economic situations, one of the most important impacts comes from natural events, especially when it comes to products. We’re talking here about weather conditions, climate changes, natural disasters like earthquakes, hurricanes, etc. The principles of supply and demand can be largely influenced by natural events especially when we’re talking about products like Corn, Soya, Wheat, and even Oil. For example, during this winter season the Oil prices had a collapse because of oversupply in the global market. However, the price had a correction and at some point it went up because the weather in the US and Europe (the largest oil consumers) was cold, so there was more demand for it. The influence of natural disasters is probably the most direct and visible. For example, the flooding in Thailand which happened in 2011 had a major impact on the Japanese Yen. Why? It is because Japan was unable to export its goods via its preferred route which is Thailand.
Political events can have an important effect on many assets and currency pairs and that includes war. You can note that in recent decades there were a series of wars and conflicts (especially in the Middle East) taking place in countries that sell oil. The most recent example of how the international political situation can influence the markets is related to Iran, which was made free from imposed sanctions. This situation boosted the oil supply in the world and in this way lowered the oil prices to record levels. The oil companies around the world had to suffer because of the oversaturation in the markets and lower oil prices. The same can also be said of the Russian economy and its national currency – the Ruble, which weakened a lot because of the abovementioned issue.
The market events are no less important when it comes to influence upon companies’ share prices and also currency prices. The most considerable impact is caused by variations of important financial instruments, such as major currencies, oil, gold prices, etc. And let us involve oil again, not because there are not other important financial instruments, but because it is always relevant as an example. The disproportion between oil offer and demand made its price very cheap in comparison to the previous years. This significantly affected the companies and countries that depend on oil, such as Russia, Canada, Azerbaijan – the currency of which fell 40-50 % within days, OPEC countries, etc.
The markets are often driven by sentiment, and the psychological factors of the masses can be more powerful than you may think. In fact it can lead to unpredictable behaviors of price movements. We say the market is bearish when there is a pessimistic sentiment reflected in a downward economic trend, and in the opposite situation, the market is bullish when sentiment is high and there is formed an upward trend. For example, the fears about the impact of Syrian refugees that came into Europe in big numbers had an influence not only on the Euro value, but also on economies of particular countries, such as Germany, Greece, Sweden, etc.
The binary options trader should also consider the reports and news that come from particular companies that he might be interested in. The quarter or annual net profit, earnings and revenue reports together with new product launches may show us the future price of an asset. Remember that when the iPad was launched, Apple share price jumped up at incredible speed. If you want a more recent example, consider the new “Star Wars” movie which helped the Walt Disney company to have a record profit for the quarter.
The release of economic data is probably the most relevant phenomena for this type of analysis. In fact, when someone says fundamental analysis we involuntarily think about economic data and news. These data can have an immediate effect upon the behavior of markets. Fundamental analysis is carried out using an economic calendar, financial news feeds, reports of government and non-government organizations, analysis of economy indicators, and so on. There are companies that specialize in this kind of intelligence.
Here are some key data that you should look for:
Gross Domestic Product, in short GDP, is about the value of goods and services produced nationally. It is a very important index of a country’s economic health.
Interest Rates are released by countries’ central banks in order to influence the economic situation with a direct impact on inflation, spending and saving.
Retail is an index displaying retail sales which can involve sales from stores, catalogues, etc, which are directed to individual consumers. In the US, there are 12000 companies used as part of the model in calculating this index. The data is divided into more categories such as food, clothing and electronics but excluding auto market which is viewed as a volatile market and can distort the total trend.Sales
Unemployment can directly show how good or bad economies are doing. In the US, the Non-Farm Payroll is one of the most essential indicators accounting for 80% of the US total workforce. NFP shows the variation in the number of people employed outside of the government, private households, farms and non-profit organizations.
In conclusion, you can see that fundamental analysis can form the most part of your decision as a Binary Options trader. However, if you want to become a complete all-round trader, you should not ignore technical analysis. This is the type of analysis that directly includes charts, price movements and the patterns they form. Here we use the indicators and tools that help us to predict based on mathematics, probability, and repetition of patterns, rather than make logical conclusions based on news. If you can combine fundamental with technical analysis, you will surely achieve success in your trading!