Fundamental Analysis

Fundamental Analysis Guide

How to Use Financial Reports, News and Data to Improve your Trades

fundamental analysis

Fundamental analysis is a form of market analysis in which the analyst or trader seeks to conduct a thorough evaluation of an asset in order to determine that asset’s inherent value using economic

and political news surrounding the asset or the country of origin of the asset or market being evaluated.

Assets always have a market value and an inherent value. The market value is a function of the response of traders to the inherent value. If the inherent value of an asset differs from the market value, there is an opportunity for correction when a market moving news item is released. A news item causes a change to the fundamental or inherent value of an asset, which leads to a market response from traders and market participants viewing the asset. Their response now causes the market value of the asset to shift towards the inherent value of the asset.

Using an asset’s inherent value to compare with its market value so as to either buy or sell, or in the case of binary options, to buy a call or put contract, is the basis of the use of fundamental analysis.

Fundamental Analysis Guide:

1. Defining Fundamental Analysis
2. Trading Economic Data Releases
3. Volatility and Economic Data Events
4. More Trading Ideas for News Releases

The binary options market is different from other markets because in addition to determining the market response to a piece of news, the trader must also be able to determine the length of the effect of the news item. Furthermore, the response of the brokers to a news item when order flows are so much in one direction as to make it nearly impossible to match orders, is another factor that the trader must contend with. Let us look at how each factor can be handled in the fundamental analysis of the binary options assets.

Fundamental Analysis in Binary Options: Matters Arising

Some issues arise and must be looked at critically by the trader when conducting fundamental analysis in the binary options market.

a)    What Fundamental Factors Affect the Various Asset Classes?

Four different asset classes are traded in the binary options market. It naturally follows that the factors that cause a change in the fundamentals of these assets will be different for every asset class.

For commodities, especially agricultural ones, factors such as weather patterns, drought, disease or civil conflict (affecting production and export) will impact prices.

For stocks, traders will be looking at things like earnings reports, mergers and acquisitions, company news, change of leadership, etc.

For currencies, the high-impact news items on the forex economic calendar will create the shift in asset fundamentals that produce trading opportunities.

Stock indices follow the movement of the listed stocks, so if there is a general sentiment in the markets or there is a wave of systemic shocks, the values of the index will be affected. Of all the assets, the movements of stock indices are the easiest to predict as they usually respond to the effects of the underlying stocks traded on them.

b)    Length of Effect

Typically, there is an initial spike, followed by a retracement and then a more sustained response to the news numbers in the direction of the initial spike as traders digest the news better. Those who want to trade binary options assets with fundamental analysis must as much as possible, avoid trading initial spikes and retracements for the reasons we shall give below. They are better off trading the response after the retracement. Not only is this the true response to the market news, but this is the more tradable part of the news response.

c)     Broker Response to News Releases

News releases tend to force the big money traders in one direction. That is why there is an initial spike. While this is a trader’s paradise in the highly liquid forex markets, this is a broker’s nightmare in the binary options market. During an initial spike, most orders are flowing in one direction, and this cold outstrip the broker’s ability to fulfill all trade and payment obligations, as there is typically no counterparty trades to use in the settlements. So as not to crumble under the weight of fulfilling orders and settling payments from profitable trade single-handedly, most binary brokers would simply freeze the asset, making it unavailable for trading.

It is for this reason that traders are advised not to trade the initial spike, but rather to wait for the period of a more sustained response after the retracement. By then, frozen assets would become available for trading once more.

For more interested reading, visit: Investopedia’s Lessons to Fundamental Analysis

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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