How to Master the Art and Science of Fundamental Analysis – Introduction
Financial instruments like currencies, stocks, and commodities move up and down every day. These movements are caused by several factors. As a trader, having a good understanding about these factors is very important. It will help you understand when to enter and when to leave a trade. One way of doing this is using fundamental analysis. This analysis entails looking at the underlying factors of an asset and the general economy. For example, looking carefully at the economic trends will tell you whether to invest in a certain asset or stay away. In this article, I will write on the best way to master the art and science of fundamental analysis.
- Economic Data
Economic data is one of the most important aspects in fundamental analysis. This data is usually released by various governmental and private sector agencies. Its goal is to show whether the economy is strengthening or not. For example, the non-farm payrolls data show the number of people different sectors of the economy are adding or reducing. For example, in the non-farm payrolls released last week, they showed that the U.S. economy added about 134,000 jobs in April. Investors and traders use this data to know whether to invest in the country or stay away. Another example of economic data is the crude oil inventories. These inventories show crude oil investors the trends that are going on in the oil market and how to invest, going forward. Another example of economic data is company’s earnings.
As a trader, it is therefore very important to understand the different types of economic and company data, when they are released, their relevance, and how to trade when they are released.
- Economic and Earnings Calendar
The earnings and economic calendars are two influential items that investors and traders use. For you to be successful in this type of analysis, you must first know the time when different data is released. The two calendars can help you know when to expect the data to be released. As a trader, I recommend that you visit the economic calendar at the end of the week. This will help you plan your trading for the following week.
- Create a plan
To master the art and science of fundamental analysis, you must have a plan. This plan will help you know how to trade when the data is released. Some traders love to be on the sidelines when the data is released. They do this for the simple reason that they cannot predict accurately the data that will be released. On the other hand, there are traders who like trading when the data is being released. They do this because of the volatility that is usually happens after the release of the data. The best thing for you to do is to create a plan and know how you will be trading in this.
I have adopted a very simple way of trading when the economic or earnings data is released. I always stay out of the market two hours before the data is released. Then, I enter certain assets 30 minutes after the data has been released. At that time, I can confidently predict the direction the asset will go.
The key to success in fundamental analysis is experience. In this, the more time you take to study and analyze the market behavior after the data is released the better it is for you.
In conclusion, to master the art and science of fundamental analysis needs three things. First, you must know when the relevant data will come out. Second, you must learn how to interpret the data. Finally, you must learn how to trade using the data, soon after and before it is released. Also, remember that the way you trade will not always work. You should learn how to adopt to that too.