Fundamental Analysis

Fundamental analysis

Fundamental analysis is a method used by traders to try and predict how markets will perform. Although it has some merit, it is best to combine this technique with other sources of information so you can decide which position you should open.

It is also important to remember that past performance is not always an indication of how a particular asset will fare in the future. Investors should therefore consider other factors before placing a trade.

The main fundamental elements investors look for are:

  • Interest rates
  • Trade balances
  • Monetary policy
  • Inflation
  • Gross domestic product (GDP)
  • Labour market figures

Each of these factors will generally have a particular effect on the markets, as this table demonstrates:

Event Effect on the market
Rise in interest rates Markets appreciate
Decrease in interest rates Markets depreciate
Increase in trade surplus Markets appreciate
Decrease in trade surplus Markets depreciate
Increase in government spending Markets appreciate
Decrease in government spending Markets depreciate
Rise in inflation Markets appreciate
Decrease in inflation Markets depreciate

Limitations

Another point to remember is that the above events will only have the expected impact if everything else stays the same. For example, if government spending increases in response to a decrease in inflation, the outcome will be neutral.

Stay informed

Economic calendars are an extremely useful way for traders to keep abreast of upcoming developments. TradeFred provides all clients with a free calendar to help you formulate your investment strategy.