Fundamentals analysis has a lot of information to look at and maybe a little daunting. However, the countries’ monetary policy and economic conditions in which transactions are conducted are extremely important for medium- to long-term investment, so it is almost always an item to check. In this chapter, let’s sort out what fundamental analysis is all about.
Meaning of fundamental analysis
- Fundamentals analysis is an analysis method that uses the economic data of a country to predict market prices. Fundamentals are also translated as “basic conditions of the economy.” These include economic growth rate, inflation rate, and fiscal spending. In a broad sense, the statements of VIPs who may affect the economy are also used as fundamentals. Gathering information on economic indicators and VIP statements released daily is extremely important for fundamental analysis.
- In the case of stock investment, this includes the business performance, sales, financial status of assets and liabilities, and financial soundness. Price-earnings ratio (PER), price-to-book value ratio (PBR), stock price-to-book value ratio (ROE), etc., are used as indicators as three typical fundamental analyzes, and traders can find that the market price is lower than the future intrinsic value. Judge whether it is expensive or not.
Difference from technical analysis
- On the other hand, technical analysis is basically an analysis method that focuses on the cycle of prices and price movements after looking at the chart. In addition to using charts showing past price movements, we also analyze them in combination with technical indicators. Examples of technical indicators are moving averages, Bollinger Bands, RSI, MACD, and so on.
- There are two analysis methods, fundamental analysis, and technical analysis, which have completely different coat colors, but each has its advantages and disadvantages, and there is no superiority or inferiority. This is often a controversial point among investors, but it is an unmistakable fact. I want to suppress the characteristics of each analysis method and wisely find an investment style that suits me. However, technical analysis is easy for beginners, so it would be better to gradually get used to fundamental analysis while conducting transactions with technical analysis at the beginning.
Major fundamentals notable in Forex
- Fundamental analysis is a very effective analysis method along with technical analysis. So what kind of data should we look at when actually conducting a fundamental analysis? There are four main types of data to look at when conducting a fundamental analysis for the first time. If you keep the four things I’m going to explain, the main points can be kept down considerably. Let’s take a look.
- First is the economic indicator. This is economic data released daily by governments and central banks around the world and is checked by a large number of investors, including professionals. Therefore, there may be big price movements before and after the announcement of economic indicators, so it will be necessary to grasp the announcement time at first. Economic indicators are the most breaking news of fundamentals data and represent the latest status. Of course, many things do not affect prices immediately, but there are also indicators that have great significance in the medium to long term, and they are data that measure the intrinsic value of the economic situation of the country.
- Economic indicators can be checked for free using the economic indicator calendar provided by Forex companies. The economic indicator calendar lists time, indicator name, the previous value, expected value, result, etc. In addition, depending on the company, the importance is also described, so it is easy to understand at a glance which index should be focused on.
- Monetary policy in the currency in which you invest is a very important factor alongside economic indicators. Examples of monetary policy include policy interest rate trends and easing tightening policies. It is also important for market analysis, but it is especially noteworthy for investors who are conscious of swap points because swap points differ greatly depending on monetary policy. However, it should be noted that monetary policy is more difficult than other fundamental analyses.
- VIP remarks are relatively easy to show price movements in the fundamental analysis as data with high breaking news along with economic indicators. A VIP here is a person who holds a major post in each country’s government or central bank and has a great influence on monetary policy and fiscal policy. However, it can be said that it is a little more difficult than other fundamental analyses because it is necessary to read the future economic situation and policy guidelines from the contents of the dignitaries’ remarks and consider the impact on the market.
- Geopolitical risk refers to conflicts and troubles between countries. Countries or regions in trouble are considered financially unstable. This is not a transition and often exists in a particular region as a long-standing problem, so what geopolitical risks the country of the currency you are trading with, and if possible, why and background. It is a good idea to check before trading.
How to analyze fundamentals
- Now that you know what fundamental analysis is and what kind of it is let’s look at the actual method of fundamental analysis. After collecting the data, we will see how to utilize the data in transactions.
- The first thing to do is to check for important economic indicators. At first, there are many economic indicators, and you probably don’t know what they mean. In such a case, I would like to check which index is attracting attention by referring to the importance stated in the economic index calendar of the Forex company. For example, in the US employment statistics, which is an economic indicator, it may move several tens of pips before and after the announcement, so I want to be sure to know the announcement time.
- The next thing to do is to collect information on fundamentals other than economic indicators. Unlike economic indicators, which have a fixed release time, many fundamentals often pop out as sudden headlines. After that, we will introduce an appropriate method of collecting information.
- Actually, there is no correct answer to the method of collecting information, and now it is possible to collect information from anywhere. Information can also be collected from old media such as television and newspapers. It is useful because you can get political and economic information evenly on TV and in newspapers. In addition, it is recommended at the beginning because the information is often transmitted in a relatively easy-to-understand manner through human hands rather than primary information.
- If you get used to it and become more focused on breaking news or the amount of information that can be processed increases, you can access the information extremely smoothly by using SNS such as Twitter. For overseas information, the speed of collecting information differs depending on whether or not you use SNS.
Points to note when conducting fundamental analysis
- While fundamental analysis has a lot of information to look at, I think you can understand that it is a very important analysis that shapes the direction of the market. However, there are some points to note in such a fundamental analysis.
Not suitable for short-term trade analysis
- Fundamentals analysis is based on the economic situation. Of course, factors such as economic indicators and VIP statements make the market react sensitively on the spot, but most of them are factors that shape the medium- to long-term market. Therefore, fundamentals analysis is suitable for medium- to long-term trading and may not be suitable for short-term trading. As mentioned above, surprises such as economic indicators and VIP remarks can lead to large price movements in the short term, but in general, when conducting short-term trades, appropriate trading strategies should be combined with technical analysis. You need to take it.
In some cases, the exchange rate is not affected so much.
- There is a lot of news every day, and it seems that there is a wealth of material for fundamental analysis, but only a small part of it directly impacts the exchange rate. There is no doubt that it is a small part of economic indicators and VIP statements. So which economic indicators and statements will move? To infer that, we need to look at historical data. Even so, it is still attracting a lot of attention, but it may be dangerous to blindly believe past data, such as when the market price has been factored in in advance reports or when the data is out of date.
- However, as the word “butterfly effect” implies, there are many materials that may impact, such as forming a big trend in the long term, even if they are not attracting attention in the short term, so it is appropriate. It is important to acquire knowledge and be able to select materials.