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What to look out for when conducting a fundamental analysis

What to look out for when conducting a fundamental analysis

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Fundamental analysis is the interpretation of various statistical reports and economic indicators. It measures things such as changes in interest rates, inflation and employment reports, which can help predict price action and trends. Fundamental analysis is a very effective way of forecasting economic conditions and will give you a relatively clear picture of an economy’s health and the forces at work behind it. Since these indicators can have a significant impact on exchange rates, it is very important to know ahead of time when they are due for release. That way, as a Binary Options trader you will know when and how to place your trades.

Indicator Hierarchy

Generally, the broadest measure of productive activity are economy-wide indicators. They record the result for an entire economy, rather than a specific sector or industry. These indicators are usually collected by governments and are the most authoritative statistics. Some examples are:

  • Consumer Price Index (CPI)
  • Unemployment Rate
  • Gross Domestic Product (GDP)
  • Producer Price Index (PPI)

These four examples will almost always have an impact on the country’s particular currency. Therefore, before you place a ‘call’ or a ‘put’ option based on one of these four indicators, always be sure to read the most up-to-date reports.

Statistics that apply to a particular segment of the economy are referred to as industry and sector based statistics. Generally they are collected and analyzed by both private sector groups and government agencies. Usually, these indicators will have more of a limited role in moving currencies, but are still important nonetheless. Some of these include:

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  • New Home Sales
  • Purchasing Managers Index (PMI)
  • Retail Sales
  • Institute for Supply Management (ISM) Survey

Lastly, there are indicators that measure business and consumer opinions on current economic conditions, their potential expectations and intentions for the future, which can be referred to as sentiment indicators.

Keep in mind that not all statistics on a single topic are of equal importance. Governments and central banks have their own unique ways of determining which factors affect them the most. Some prefer one measure to another which will cause the markets to allocate that much more importance to the favored statistic. Additionally, some statistics can gain or lose interest over a period of time depending upon their scale of volatility or due to sudden changes in the nation’s economy.

Conclusion

Conducting a proper fundamental analysis means knowing which indicators are most paramount to each particular economy. Therefore, you must always have access to an economic calendar that  highlight’s each events importance level. Although nothing is 100 percent foolproof, a good fundamental analysis can often be the key to profiting in the online trading world.

 

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