Fundamental analysis is a way the trader can look at the Forex market by analyzing the economic, social, and political forces that may affect the supply and demand of an asset. Using supply and demand as an indicator of where price could be headed is simple, once you know how to work it. This type of analysis examines the key ratios of a business to determine its financial health. The more challenging part is analyzing all of the factors that end up affecting supply and demand. Basically, you have to look at a few factors that will determine who’s economy is doing good and who’s economy is doing badly. As a trader, you have to understand the reasoning certain events affect a country’s economy and then affect the demand for its currency. The idea for this analysis is that if a country’s current or even future economic outlook is good, their currency should strengthen and possibly benefit you and your trading performance.
Fundamental analysis is an amazing tool for a trader to employ fundamental techniques in order to make solid decisions. Shawn Lucas is the head trader at The Apiary Fund and is always encouraging his trading community to continue educating themselves when it comes to the Forex market so they can continue to grow and strengthen their strategy and system, and in turn, become successful. You, as a trader, will use the data from the analysis to predict market development and determine the value of the stock, in hopes of predicting if the stock is either overvalued or undervalued. Many traders, like Shawn Lucas, will use both fundamental and technical methods to determine when or where to place trades and they tend to favor using one over the other as well. The most popular tools of fundamental analysis focus on earnings, growth and value in the market. Some of the factors you need to identify are price to earnings ratio, price to sales ratio, earnings per share, and return to equity. Keep in mind, these numbers are just tools and can not give you the magic answer. They cannot give you the answer to buy or sell by themselves and must be weighed as a team with other considerations and ratios. Overall, what these numbers do is serve as a reference point to compare individual companies' worth.