Fundamental analysis is the process of assessing an asset’s underlying value by looking at relevant economic, financial and geopolitical factors. Traders use this information to judge whether an asset may be overvalued or undervalued.
For CFD traders, understanding what is fundamental analysis often means focusing less on long-term company performance and more on macroeconomic data, central bank decisions and major news events that may affect prices in the short term.
These releases can create significant market volatility, but they also increase trading risk. Spreads may widen, orders may be filled at a different price from the one requested, and overall trading costs can rise quickly. Understanding the data is only part of the process. Traders also need to understand the cost and risk of trading around major announcements.
Quick Takeaways
- Fundamental analysis in CFD trading often focuses on macroeconomic data rather than long-term company earnings.
- Major news events can lead to wider spreads and slippage, which may increase trading costs.
- Stronger-than-expected economic data does not always cause prices to rise, especially if the market has already priced in the result.
What Is Fundamental Analysis in Trading?
Fundamental analysis in trading is the process of assessing an asset's potential price direction by analysing economic, financial and geopolitical factors. It helps traders understand how major events and data releases may influence market sentiment and price movements.
For long-term investors, fundamental analysis often involves assessing a company's financial performance, valuation, earnings reports and management to identify shares that may be undervalued. The aim is typically to build positions that can be held for years.
For CFD traders, the focus is different. Short-term price movements are often driven by macroeconomic data, central bank decisions and other market-moving events. Rather than assessing a company's long-term prospects, traders look for catalysts that can trigger immediate changes in market prices.
Because CFDs are leveraged products, these events can also increase market risk. Volatility may rise sharply, spreads can widen, and orders may be executed at less favourable prices during fast-moving markets.
How Fundamental Trading Works: Key Macroeconomic Drivers
Fundamental trading involves monitoring economic data and major market events to assess economic conditions and anticipate how financial markets may react. Rather than focusing on individual companies, traders look at macroeconomic developments that can influence currencies, indices and other financial markets.
Some of the most important macroeconomic drivers include:
- Central bank decisions: Interest rate announcements and monetary policy updates from central banks, such as the Bank of England and the US Federal Reserve, can have a significant impact on currency values and broader market sentiment.
- Employment data: Reports such as the US Non-Farm Payrolls (NFP) provide insight into the strength of the labour market and can influence the US dollar, stock indices and other financial markets.
- Inflation data: Measures such as the Consumer Price Index (CPI) help traders assess inflationary pressures and whether central banks may consider raising, lowering or maintaining interest rates.
Many traders compare the market forecast with the actual economic data when it is released. The largest price movements often occur when the published figures differ significantly from market expectations, as traders rapidly adjust their positions to reflect the new information.
For CFD traders, these events can also increase market risk. Volatility may rise sharply, spreads can widen, and orders may be filled at less favourable prices during fast-moving markets.
Fundamental Analysis vs. Technical Analysis
Fundamental analysis focuses on the economic and financial factors that influence market prices, while technical analysis examines historical price movements and chart patterns to identify potential trading opportunities.
Fundamental analysis helps explain why a market may move by assessing macroeconomic conditions, central bank policy and other market-moving events. Technical analysis focuses on when and where to enter or exit a trade by analysing price action and technical indicators.
Many traders combine both approaches rather than relying on just one. They may use fundamental analysis to understand the broader market outlook and then apply technical analysis to identify suitable entry and exit points. If you would like to learn more about chart-based analysis, read our guide on what is technical analysis.
Feature | Fundamental Analysis | Technical Analysis |
|---|---|---|
Primary Focus | Economic data, financial news and central bank policy | Price action, chart patterns and trading volume |
Common tools | Economic calendars, economic reports and central bank announcements | Moving averages, support and resistance, and technical indicators |
Helps answer | Why a market may move |
Why It Matters to a CFD Trader: The Cost of Trading the News
Trading around major economic announcements carries significant risk. Sharp market volatility can affect trade execution, increasing trading costs and making outcomes less predictable.
Spread Widening
During major announcements, such as the US Non-Farm Payrolls (NFP), market liquidity can fall sharply. As a result, EUR/USD spreads can widen significantly during major announcements - as an illustrative example, a spread that typically sits around 1 pip in normal conditions could widen to over 10-15 pips during periods of extreme volatility, though the exact figures vary depending on market conditions and liquidity at the time.
This increases the cost of opening or closing a position and can potentially turn an otherwise profitable trade into a losing one because of higher transaction costs.
Slippage
A stop-loss order does not guarantee execution at your chosen price during fast-moving markets. If the market gaps beyond your stop level, your order will normally be filled at the next available price, which may be significantly less favourable than expected. This means your actual loss can exceed the amount you originally planned to risk.
Overnight Swap Charges
If your trading strategy involves holding a leveraged CFD position for days or weeks while waiting for a macroeconomic view to develop, overnight swap charges can accumulate. Over time, these costs may reduce your overall return or increase your losses, particularly if a position is held for an extended period.
Common Risks When Trading the News
The main risks of trading around major economic announcements include unpredictable price movements, execution risk, and the way leverage can magnify losses.
One of the most common misconceptions is that positive economic news will automatically push prices higher. In reality, markets often price in expectations before the data is released. When the actual figures match or only slightly exceed expectations, some traders may take profits, causing prices to move lower instead. This is commonly known as "buy the rumour, sell the news."
It is also common for prices to move sharply in both directions immediately after a major economic announcement. During this period, spreads may widen and price movements can become highly erratic, making it difficult to enter or exit a position at the expected price. For this reason, some traders prefer to wait until the initial volatility has eased before considering a trade.
Leverage can increase these risks further. A sharp move against your position can quickly reduce your available margin and may trigger a margin call or automatic position close-out, depending on your broker's margin policy.
Regulated CFD providers in the UK are required to disclose the percentage of their retail client accounts that lose money, and analysis by the Financial Conduct Authority has found this figure to be as high as 82% across a sample of client accounts.
Because major economic announcements often lead to rapid price movements, the potential for losses can increase significantly if risks are not managed carefully.
Conclusion
Understanding what is fundamental analysis helps explain why markets move by highlighting the economic and financial factors that influence price movements. For CFD traders, however, understanding the data is only part of the process. It is equally important to manage the risks associated with trading during major economic announcements, including wider spreads, slippage and increased market volatility.
Using fundamental analysis alongside effective risk management can help traders make more informed decisions when markets become volatile. To learn how economic events fit into a broader trading plan, explore our guide on cfd trading strategies.
FAQ
What Are the Basic Steps of Fundamental Analysis?
Fundamental analysis usually begins by identifying the key economic indicators that may influence the market. Traders compare market expectations with the actual data when it is released and assess how the results may affect market sentiment and price movements. They also consider factors such as volatility, liquidity and trading costs before deciding whether to open a position.
Can Fundamental Analysis Be Used for Short-Term Trading?
Yes. Many short-term traders use fundamental analysis to understand how major economic announcements may affect market prices. Economic data, such as inflation reports, employment figures and central bank decisions, can trigger sharp price movements over a short period.
How Can Beginners Learn Fundamental Analysis?
A good starting point is to follow an economic calendar and monitor scheduled announcements from central banks and government agencies. Watching how currency pairs, indices and other markets react to economic data, such as the Consumer Price Index (CPI) or US Non-Farm Payrolls (NFP), can help beginners understand which events have the greatest influence on market sentiment.
Does a Positive Economic Report Always Mean Prices Will Rise?
No. Financial markets are forward-looking, and expectations are often reflected in prices before the data is released. If the results simply meet expectations, or are already priced in, prices may move very little or even fall as traders close profitable positions. This is commonly known as "buy the rumour, sell the news."
Why Do Spreads Widen During Major Economic Announcements?
Spreads often widen during major economic announcements because market volatility increases and available liquidity may decline. During these periods, brokers and liquidity providers may quote wider bid and ask prices to reflect the increased uncertainty and risk. As a result, the cost of opening or closing a trade can be significantly higher than under normal market conditions.