Introduction to Types of Trading: Fundamental Traders 5.00 / 5 (100.00%) 1 vote

When traders analyze the markets to determine potential future prices there are two basic methods used.  One is technical analysis, which is based on the idea that price patterns repeat themselves in the markets.  The other is fundamental analysis which is based on the idea that important economic data can be used to forecast asset prices.  Fundamental traders keep track of changes in the economic health of countries to determine the movement of asset prices such as gold prices and the value of one countries currency versus another countries currency.

Economic Indicators and Their Importance to Fundamental Traders

An economic indicator is some type of financial data that has a relation to the price and value of an asset.  These assets can be commodities such as coffee or gold, currencies of various countries and even individual stocks.  Each country reports their economic indicators on a weekly or monthly basis, so they are well known by all traders.  Some of the most important economic indicators that are used by fundamental traders in their analysis are interest rates, the consumer price index (CPI) and producer price index (PPI), trade balance data, and employment data.

All of this data is important, but the importance of each economic indicator can vary based on the conditions in each country and around the world.  For example, a country that has been having trouble with employment will find that the unemployment report will be weighed more heavily than the trade balance data.  If inflation is a concern, the CPI may become the most important indicator for a country.  This is fluid and changes over time, so a fundamental trader must always keep his finger on the pulse of the economies of various countries.

Trading the News

Many traders stay away from the markets during important economic news announcements.  These news reports can cause extreme volatility in markets, and for those who are not good or comfortable with fundamental analysis the news reports can become a trap.  Markets react to the news not only based on the actual data, but also based on the expectations of traders.  So, a country may report a good employment number only to see markets sell off because traders were expecting the data to be even better.  This happens because professional traders will often do their analysis and then place trades before the news is announced.  If the news is not in line with expectations it can cause a flurry of buying and selling, and asset prices can rapidly change direction and move rapidly.  Trading the news can be difficult and risky, but those who master it will find that it yields extraordinary profits.

In Conclusion

While many traders rely on technical analysis, learning how to read and interpret fundamental data is a necessary part of learning how to trade the markets effectively.  Markets can make seemingly contradictory movements in the short term, but in the long term the markets will always move correctly based on the underlying fundamentals.  Learning to be a fundamental trader can help you by giving you insight into the reason markets move as they do, even if you base many of your trades on technical price patterns or price action.