Fundamental Analysis
From Knowledge to Profit
“…Most experienced traders will adopt strategies from both fundamental and technical analysis when making their trades.”
When it comes to market analysis, there are two main schools of thought which most traders subscribe to: Fundamental Analysis and Technical Analysis. While these two approaches may appear distinct, most experienced traders will adopt strategies from both fundamental and technical analysis when making their trades. It is only wise, after all, to use all the resources available to you when it comes to market analysis, and the knowledge gained from one school of thought can be used to confirm or inform the knowledge gained from the other.
The Basics
Fundamental analysis is method of studying securities such as stocks and bonds in order to measure their intrinsic value. This done through the examination of related economic and financial factors. Ultimately, fundamental analysis aims to produce a quantitative value that investors can compare with a security’s current price, therefore indicating whether the security is undervalued or overvalued.
Long Term
Fundamental analysis evaluates the market over the long-term, taking into consideration data over a period of years. It encompasses economic analysis, industry analysis and company analysis. This kind of investment strategy looks at long-term trends instead of short-term price fluctuations, evaluating chart patterns in order to study variations in price movement.
Breaking it Down
The health and performance of a security can be determined by studying its key numbers and economic indicators, allowing traders to identify the fundamental strengths or weaknesses of any given security. The general principle of Fundamental Analysis is to go long on securities that are strong, and short on those that are weak.
How is Fundamental Analysis Used?
The ultimate goal of Fundamental Analysis is to assign a quantitative value to a security that investors can then compare with the security’s current price, thus indicating whether the security is overvalued or undervalued. Due to the long-term nature of Fundamental Analysis, economic calendars are often used to predict different economic figures and values according to price fluctuations over the months or years.
Key Figures
When it comes to Forex trading, there are a number of powerful figures that move the Forex market. Paying attention these figures will allow traders to analyze the economic performance of a market thus make predictions of performance. These figures are:
- Interest Rate
A country which increases its interest rates will see a strengthening of its currency. This is due to investors shifting their assets to that country in order to reap higher returns. It is widely believed that a currency’s interest rate is the biggest factor in determining the perceived value of a currency. When it comes to economic growth, it is generally accepted that moderate inflation of a country’s currency will help boost its economy.So how does this apply to forex? What is important to know here is that the flow of global capital into and out of a country is determined by the interest rates of currencies. The higher a country’s interest rate, the more likely its currency will strengthen. - Trade Balance
Trade balance refers to the difference between the total value of exports and the total value of imports. A positive trade balance shows the demand of goods of the country on the international market, in addition to the fact that the country does not consume all that it produces. On the contrary, a negative trade balance suggests that the country consumes foreign goods together with its own goods. A country with a significant trade balance deficit will, most of the time, have a weaker currency due to constant commercial selling of its currency. - Employment
Employment indicators illustrate the overall health of an economy of business cycle. What will help traders in their understanding of how an economy is functioning is an evaluation of how many jobs are created, what percentage of the work force is actively working, and how many new people are claiming unemployment. A sign of weak economic activity is a decrease in payroll employment. This may eventually lead to lower interest rates, which will weaken a country’s currency. - Gross Domestic Product (GDP)
Gross Domestic Product (GDP) refers to the monetary value of goods and services that are produced by a country over a given period of time. Typically, GDP is measured on a yearly basis, which means that the current GDP rate reflects the comparison between current growth and the growth which was seen during the previous year. A primary indicator of the strength of economic activity is the quarterly GDP of a country. A high GDP figure is typically followed by expectations of higher interest rates, which usually strengthens a currency.
Wrapping It Up
To sum it up, fundamental analysis serves to answer questions regarding whether or not a company’s stock is a good investment. While fundamental analysis is used most often in the context of stocks, but it can also be adapted to any security. As long as you are looking at the economic fundamentals, you are performing fundamental analysis.
Fundamental analysis is concerned primarily with earnings, assets, expenses, and liability. These figures are not typically factored into technical analysis. The subject of which method of market analysis is better is a hot topic of debate. As a trader, you now have access to the pros and cons of both methods and can adopt the one that better suits your needs—or better yet, a blend of the two so you may bring your best strategies to the markets. You can read more about technical analysis here.