Introduction to Fundamental Analysis

What is Fundamental Analysis?

Fundamental analysis studies core elements that influence the economy of a specific entity, like a stock or currency. It’s goal is to forecast price action and trends by analyzing economic indicators, government policy, societal and other factors within a business cycle framework.

If you consider the market as a big clock, fundamentals are the gears and springs that shift the hands around the face. Anybody can tell you what time it is right now, but the fundamentalist knows about the inner functioning that move the clock's hands towards times (or prices) in the long term.

 

Are you a professional or fundamentalist?

There's a tendency to pigeonhole traders into two distinct schools: Fundamental or technical. In fact, most smart traders prefer a mixed approach versus just pursuing either type.

Fundamentalists need to keep an eye on signals produced from price charts, while few technicians can afford to totally ignore approaching economic data, critical political decisions or demanding societal issues that influence price action.

 

Forecasting economic conditions utilizing models

Fundamental analysis is successful at forecasting economic conditions, but not necessarily exact market prices. Studying GDP forecasts or employment reports gives you a clear picture of an economy's health and the forces at work powering it. But you still need a method to translate that into particular trade entry and exit factors.

The bridge between fundamental data and a specific trading strategy comes from a trader model. These models use current and traditional scientific data to estimate future prices and translate those into specific trades.

 

Beware of "analysis paralysis"

Projecting models are both art and science, and there are so many approaches that traders can get overloaded. It can be difficult to choose when you know enough to pull the trigger on a trade with assurance.

Many investors switch to technical analysis at this point to test their hunches and see when price styles suggest an entry.

 

Look for basic drivers first

The fundamentals include almost everything that makes a country and its currency tick. From interest rates and central bank policy to natural disasters, the fundamentals are a powerful mix of unique plans, erratic behaviors and unforeseen events.

That said, not every improvement will move a country's currency. Try to get started by identifying the most important members to this mix versus following every fundamental out there.

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