Key Considerations when Using Fundamental Analysis

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Fundamental analysis is an umbrella term that refers to the approach in which you trade based on the worldwide aspects that affect supply and demand. When performing fundamental analysis, you need to take the following into consideration. 

Central Banks 

When it comes to trading with fundamental analysis in mind, central banks are almost always in focus. The actions that they may and can take are massive: they can raise or lower interest rates, choose not to move them, indicate that their outlook will change soon, implement new, non-conventional strategies, intervene in the market, or maybe devalue the currency.

Doing fundamental analysis of central banks usually takes time as you will have to pore over statements and speeches by central bank officials along with trying to put your head in theirs to try to forecast their next decisions.

Economic Data 

When doing fundamental analysis, you will also have to trade economic releases, which can be really tenuous and challenging. Even the most intelligent minds in major banks all over the world have a hard time predicting how an economic release will turn out to be.

They use models that may consider different aspects, but they can still be largely wrong in their outlooks. That’s the reason why market moves so drastically right after economic releases. Most investors usually go with the flow – or follow the herd – of those experts. So usually, markets move in the direction of the consensus before the release. 

If the consensus is wrong about the final result of the release, the market will change and move into the direction of the actual result. That means if the release is better than the consensus, there would be a positive reaction. But if it’s wrong, then the market will move the opposite way. 

One good way to trade economic releases well is to find when you want to commit. Are you going to trade before the release? Are you going to trade after the release?  Both of these options have their benefits and both have their risks.

If you trade before the release, you can benefit with going with the flow of the consensus, though other fundamental factors around the world can affect the market more than what the consensus says. 

Trading moments before the economic release means you have an opinion about the consensus and if you’re wrong, you are risking large losses. Meanwhile, if you trade right after the economic release means that you are trying to have a position in a low-volume market. It will then be challenging to get at your desired price. 

Geopolitical Tensions 

It is a known fact that countries around the world are not really that friendly with each other. There would be global conflicts and there could be inevitable wars. Such geopolitical tensions have a negative impact on tradable products since they could change the supply and demand for certain products. 

Seasonality 

At the end of the calendar year, most investors will sell stocks that have slumped throughout the year to claim capital losses on their taxes. There are also times when the exiting positions before the year-end selloff starts. Meanwhile, investors also usually come back and pick up equities throughout January (hence the name January Effect). 

 

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