What is fundamental analysis?

Fundamental analysisHave you ever noticed how real events move the markets? For example, when something bad happens – such as an act of terrorism or natural disaster – the relevant country’s financial markets often fall.
For example, when the UK voted for ‘Brexit’ in 2016 the British Pound immediately dropped around 20% in value against the US Dollar. This was a direct reaction by the market in response to the result.
Trust me, this principle is absolutely sound. As events (good or bad) unfold, they feed into the sentiment of market participants, which then results in price movements. Good events support currency price, while bad events weaken a currency.
You can get a sense of this by watching the mainstream news channels. They will cover market moves and explain the reasons behind them.
Fundamental analysis is a process of linking real-world events to price movements.
This process can include anything that could be identified as a reason behind why the price is moving in a particular direction. For example, if the price of a currency is falling, then fundamental analysis would try and determine why that was happening.
Fundamental analysis is also used to try and determine which way a currency might move in the future. It can be utilized for both short-term and long-term trading.
Professionals use fundamental analysis
Fundamental analysisIt’s important to recognize that the overwhelming majority of professional traders and investors use fundamental analysis as the core of their money making strategy.
If you see inside professional trading floors on the financial news channels, you will very rarely see the traders staring at charts only. They almost all use the big news terminals such as Bloomberg, Reuters, Dow Jones, MNI and more.
These terminals are solely designed to get news and information to those traders fast. They also cost thousands of dollars per month for each individual license.
Price charts and technical indicators, on the other hand, are generally free. There are some smaller funds or managers that do use solely technical analysis – but you will struggle to find credible examples of more than a handful.
So almost all professional fund managers trade with fundamental analysis.