As discussed in our previous article, in the foreign currency exchange market, there are three different types of forex analysis used in predicting the future movement of the market.
In this article, we’ll discuss about the Fundamental Analysis, its function and its significance in the forex market
First of all, let’s talk about what fundamental analysis is.
Fundamental analysis is the procedure of assessing a security that involves attempting to predict and measure its intrinsic value through the evaluation of the related economic, financial and other qualitative and quantitative factors.
The trader who uses fundamental analysis tries to examine all the factors that might influence the price of the security, which involves macroeconomic factors – such as the overall economy and industry conditions, and company-specific factors – such as the examination of financial data, business concept, management and competition.
Similar to other types of analysis, the objective of the fundamental analysis is to develop a forecast and take advantage and profit from the future price movement.
Fundamental analyst predicts the future price of the security through the use of the economic, industry and company analysis. With the combination of those three factors, the fundamental analyst is able to derive the security’s current fair value, which would be used to forecast the future value.
If the fair value is not equivalent to the current value of the security, the fundamental analyst acknowledges that the security is either under priced or overpriced. Say for example, if the fair value of the security is higher than its current price, then it is considered as “under priced”. On the other hand, if the security’s fair value is lower than its current value, then it is acknowledged as “overpriced”.
Fundamental analysts believe that the security’s value will ultimately gravitate towards its fair value. And since fundamental analysts uses the security’s fair value as a basis in predicting its future value, their trading decisions are greatly influenced by it.
Say for example, if the security’s value is overpriced, they believe that the security will fall and thus they consider this as a good time to SELL.
On the other way around, if the security’s price is under priced, they will see this as a sign that the price will go up and thus, considers this as a good time to BUY.