The basics of fundamental analysis

Fundamental analysis involves assessing the underlying reasons for market movements and interpreting data and news releases which influence the value of financial markets. Many long-term traders consider the fundamentals which can range from a single company’s quarterly reports, national GDP or central bank decisions. This information is considered as the underlying driver of the market and controls the basic demand for the stock, commodity or currency over a period of time. Fundamental binary options traders use news and data release events to determine whether price is likely to move higher or lower which, if interpreted correctly, can provide very profitable trading opportunities.

Key economic indicators and trading the news

Key economic indicators can be described as the most important data for currencies and stock markets. Economic indicators are data which reveals the general health of an economy. This will directly affect the demand for a currency and investment within the region or country. Examples of this are interest rates by central banks, unemployment figures, GDP figures and consumption data. Each of these will show fundamental analysts whether the underlying trend in a financial market is up or down and many will take medium to long-term positions based on this information. Binary options traders can also use the release of this information to take short-term trades based on the positive or negative interpretation of the news. The interconnected nature of financial markets means that this information will be available within seconds of its release and reactions can be witnessed across all financial markets in the immediate aftermath of the release of important data.

Trading the data release can be highly profitable for fundamental analysts. In the days or hours building up to an important news release, such as an interest rate decision or unemployment figure, analysts and economists will make predictions of the expected figures. Once the actual figures have been released these will be compared to the anticipated figures and the market will react if they are deemed to be higher or lower than the expected level. This creates an excellent opportunity for fundamental traders to take a position and take a long or short position based on this news. With binary options trading, timing is everything and trading the increased volume and momentum of the reaction with very short options is one of the best ways to capitalise on fundamental data releases. Often, the market will return to a level of normality within an hour of the information being made available.

Non-financial events are also important for fundamental analysts

Fundamental analysis can be used beyond the release of economic data within a region or economy. Indeed, many fundamental traders also watch non-financial global events in order to support their trading decisions. Stocks, currencies and commodities all react to global affairs and political decisions can be highly influential in dictating the underlying trend in a market. One clear example of this is the effect that political tensions in the Middle East have on the price of oil. The price of oil is sensitive to the regions stability given that the area supplies a very large part of the world. If this supply is threatened, through war or global terrorism, it will push the price of oil higher. Similarly, the recent rise in the value of gold was largely attributed to the economic crisis causing investors to buy gold as a safe-haven for their money. All of these large events can be seen to drive market direction and provide excellent opportunities for both long and short-term binary options traders.