“Fundamental analysis and Macroeconomics.”
What is Fundamental analysis and is it important to traders?
One reason for this is the vague nature of this whole field. The pundits often contradict each other – and sometimes even themselves – so it’s hard to get a clear picture of what’s going on.
Hardcore traders invariable get bored when you start talking about things like Fundamental Analysis or Macroeconomics. They prefer to dive straight into the charts and into the Technical Analysis side of things.
What is fundamental analysis?
Fundamental Analysis deals with the intrinsic value of any security, for example of a stock. In case of the latter, we look at different key numbers, at cashflow, balance and so on. We end up with conclusions that often contain a price target for the next year or so, and a recommendation as to why the company is currently a buy, a sell or a hold. When using fundamental analysis, we thereby focus on the value of the security and not so much on the development in the price.
What is the difference between fundamental analysis and technical analysis?
This is in contrast to Technical Analysis where we only look at the development in the price. Fundamental analysis has its strength in the long-term perspective where technical analysis has its weakness. But fundamental analysis is not suitable for Daytrading. Because when you daytrade you want to get in at the best price, and out at the best price, and you have to hit the bulls’ eye so to speak. This is where Technical Analysis is a strong tool. When you focus on the value of an asset it can take time for the market to correct in relation hereto. Put differently. Fundamental analysis is like an annual plan where the tool you need for daytrading is the plan for today.
What is macroeconomics?
A bit in the same genre but differently useful when daytrading is macroeconomics. When we switch to a helicopter view on the economy, we talk about Macroeconomics. Focus is on the national economies and global economy at large. Themes are monetary and fiscal policy, economic growth, unemployment, or inflation – just to name a few. The U.S economy is at the forefront of that analysis, being the largest economy in the world (with China in second spot).
Can I use macroeconomics for trading?
It is essential for the trader to always keep an eye on current macroeconomic tendencies and events, as they give context to the market, he or she is trading. Otherwise, we would be trading blind. By taking macroeconomics into consideration when trading, it can give us an understanding of the current development in the asset we are trading. And when we combine the knowledge, we get from Technical or fundamental Analysis with a macroeconomic insight it can help us foresee a move in either direction
On the other hand, it is equally important not to fall into the trap of overanalysing the economic data. Macroeconomics is extremely complex, and it’s next to impossible to set up simple rules for the outcome corresponding to certain events. This is due to the fact that moves in the market is created by investors and we can never fully predict how market participants will react. And therefore, we sometimes see what seems to be illogical moves to specific macroeconomic events. This will though be exceptions. Mainly macroeconomic insight will provide us with a good understanding of why the market moves like it does.
How can I learn to work with macroeconomics?
Like everything else it takes time to learn to understand and use macroeconomics information. A good way to start is to use one of the many good and free calendar services you can find online. An example is www.forexfactory.com. They have a good free calendar. Next to every event you can push the folder next to the event. A description of the actual event and what impact it has will be shown.
When We do live trading, we always cover the macroeconomics as well in the daily trading. We explain what events we keep an eye on, what we expect from it and why. We also offer live coverage – and trading – of key European and American news events, such as the release of inflation numbers, Non-Farm Payroll and FOMC decisions on the Fed Fund Rate. You can buy access to live trading here.
Finally, we often write posts on social media about This includes a market status and a look at the week ahead, i.e. which main events are listed in the economic calendar and how are they likely to affect the markets in case of different scenarios (“good” or “bad” numbers)?