If George Soros could break the Bank of England with a lot of knowledge and skill in fundamental trading then there is no reason you couldn’t do the same! Fundamental trading requires the skill of looking at the macroeconomic data of a country’s financial performance and then drawing conclusions based on that data. Consequently, anticipating how that country’s currency will perform next. No one said it would be easy, but it’s not impossible either.
Many traders analyze the performance of currency pairs by using fundamental indicators. This involves paying close attention to current events, economic calendar events, political news, investment news, and even social data. Some popular sources of economic data information are well-known news sites such as Bloomberg, CNBC, Marketwatch, etc. There are many more. Television news reports are also widely used. And it’s not just the financial news that has an impact.
Once the fundamental traders have gathered all of their pertinent information, they will then form conclusions on how they predict the markets will respond to all of these socio-economic and geopolitical events and factors. Aggregating the expected market response to these factors forms the sentiment on a currency pair. If the predicted outcome is good then the currency will rise in value and vice versa.
Market sentiment can play a huge part in fundamental analysis and there are several sentiment indicators such as the German ZEW Survey, which surveys hundreds of financial experts about their predictions for the European economy. They keep it simple with only three potential outcomes: positive, negative or no change.
Sentiment indicators are very popular with fundamental traders because they enable analysts to quickly gauge whether confidence in the market is optimistic or pessimistic and base their decisions on the expectation of others in the market. There is no substitute for doing your own research, but when your time is in short supply sentiment indicators can either confirm or deny your initial finding to help you reach a suitable conclusion.
An interesting facet of fundamental trading is that market movement is not greatly moved by particular numbers, the greater price action movements are more commonly prompted by news that is outside of expectations. If the published inflation figures fall within a close margin of predicted percentages, it won’t make a huge difference. However, if a predicted inflation figure of 2% (arbitrary numbers) is exceeded by a large margin (say 4%) or is not achieved (maybe 0.2%) then greater market fluctuations will occur.
There is no shortage of macroeconomic data available, so take every opportunity to watch the news, read the financial news and keep abreast of world events. You can read on the train to work or listen to economic podcasts while driving. However you choose to keep up with the world financial news, the more you know, the better equipped you are to make better fundamental trading choices.