Fundamental analysis refers to the study of the core underlying elements that influence the economy of a particular entity. It is a method of study that attempts to predict price action and market trends by analyzing economic indicators, government policy and social factors.
Fundamental analysis is a very effective way to forecast economic conditions, but not necessarily exact market prices. For example, when analyzing an economist forecast of the upcoming GDP or employment report, you begin to get a fairly picture of the general health of the economy and the forces at work behind it. However, you’ll need to come up with a precise method as to how best to translate this information into entry and exit points for a particular trading strategy.
What Influences Prices?
- Macroeconomic factors, inflation, unemployment, and industrial production
- Economic indicators are snippets of financial and economic data
- Statistics that help observers monitor pulse of economy
- Each currency has an overnight lending rate attached to it determined by the country's central bank
- Lower interest rates usually lead to depreciation in the value of the country's currency