Fundamental analysis is One of the most important methods In market study and decision making. It is often broader than other forms of analysis, which include technical and sentimental analysis.
In this article, we will look at what fundamental analysis is and how to do it well.
What is fundamental analysis?
Fundamental analysis is defined as a method of analyzing financial assets such as stocks, commodities, forex, bonds, and cryptocurrencies to determine whether a financial asset is to buy or sell.
He. She Considers the core issues of the company that have an impact on its evaluation. He. She also look The latest news and data And how does it affect these financial assets.
The goal of fundamental analysis is Find out if an asset is undervalued or overvalued. It also seeks to identify key news that will move assets.
A good example of this When the Federal Reserve makes its decision on the interest rate. When this happens, it usually affects the prices of most assets such as cryptocurrencies and stocks.
Who benefits most?
Fundamental analysis is a useful process It is used by all types of traders. However, it is usually more beneficial for swing traders and longer-term traders. most of the time, Exploiters rarely use it Because they usually don’t care about head numbers.
On the other hand, normal Day traders use fundamental analysis when planning their trading strategies.
For example, volatility day traders tend to use fundamental data to predict when movements will be higher. This is because the market is usually more volatile when major numbers are released.
Fundamental analysis vs technical analysis
Fundamental and technical analysis are different from each other. while Fundamental analysis refers to the study of economic and financial dataAnd idiomatic analysis is Uses Technology Tools to help you identify entry and exit levels.
In most cases, technical analysis is used by day traders and speculators while fundamental analysis is mostly used by long-term traders and swing traders.
This is simply the process of using technical indicators such as moving averages, the Relative Strength Index (RSI), and the Awesome Oscillator to determine entry and exit points.
The Federal Reserve and Fundamental Analysis
In our experience, we believe that the Fed is the most important piece of fundamental analysis. A good example of this is shown in the chart below.
The chart shows that the S&P 500 rose between March 2020 and early 2022. This trend coincided with a period when the Federal Reserve cut interest rates and implemented the largest policy of quantitative easing (QE).
Then the index started to decline in 2022 as the Fed dramatically raised interest rates.
the feed it Very important in that It affects all financial assets around the world. This happens because of the special role of the United States as the world’s largest economy and the US dollar as the world’s reserve currency.
So, broadly speaking, any fundamental analysis should start with the Federal Reserve. As such, you should Look at the main factors that move the Federal Reserve. Let’s see some of the most important economic numbers to watch that drive this institution.
inflation data
economic inflation It is an important part of the economy. It simply indicates High price of items. In fact, inflation is one of the dual purposes of the Federal Reserve. It was formed in an effort to ensure stable inflation.
In most cases, it is a The Fed raises interest rates when it thinks inflation is getting out of control. Then it lowers interest rates when it hopes to maintain inflation. Therefore, traders look at three important inflation numbers, including:
- Consumer price index (CPI) – This number takes a look at the wide variability in item prices. It is published on a monthly basis.
- producer price index (PPI) – This figure looks at the change in prices of the items that producers pay for. It tends to have an effect on the cost of the items that people buy.
- personal consumption expenditures index (PCE) – This is the Fed’s preferred inflation tool, and it measures consumer spending.
Related “ 10+ economic data you should be looking out for
employment
Another dual role of the Federal Reserve is to ensure that The economy has a low unemployment rate. In the United States, the government publishes key employment figures each month. For most periods, these numbers come in every first Friday of the month.
Therefore, traders look at these numbers Determine whether the Federal Reserve will raise or lower interest rates. When inflation remains stubbornly high and the unemployment rate is low, it increases the likelihood that the Fed will raise interest rates.
There are other economic numbers that investors and traders watch in fundamental analysis, including:
- PMIs – These figures are published every month to show the performance of the main sectors of the economy. They include services and manufacturing data.
- retail – These numbers show how much retail sales people in the United States bought each month.
- Consumer confidence These numbers are important because consumer spending is the largest part of the US economy.
- production – The data shows things like industrial and manufacturing production that show the volume of production.
This fundamental analysis can help you decide whether to buy or sell financial assets, including stocks, currencies and indices.
Other economic data
Nonfarm payroll data shows how many people are adding or subtracting from different sectors of the economy. Investors and traders use this data to find out Whether to invest in the country or stay away.
Another example of economic data is a company’s earnings or stock of crude oil. These stocks show crude oil investors the trends in the oil market and how to invest in the future.
As a trader, it is very important that you do this Understand the different types of economic data and company datawhen it is issued, its suitability, and how it will be traded when it is issued.
Fundamental analysis in stocks
It is also possible to do Fundamental analysis in stocks. This includes looking at several of the key factors that move stocks. Some of the most basic things to consider when trading and investing in stocks are:
- earnings This is where you look at the company’s earnings and decide whether to invest or trade them. You can Use the economic calendar To see which companies are about to publish their financial results.
- evaluation – You should consider stock valuation. This is where various valuation metrics are used to see if a stock is overvalued or undervalued. You can use multiple metrics to compare and evaluate discounted cash flows.
- Company news Another essential thing to keep in mind is the company’s latest news. This news includes management change, merger and acquisition and investigation.
In addition to all this, you can use the main tools that most brokers provide to perform stock analysis in stocks. some of these features Level 2, time and sales.
Level 2 provides accurate bid and ask prices for stocks. Time and sales are considered to be the specified time and volume out of stock. You can use this data to decide whether to buy or sell a stock short.
Fundamental analysis in cryptocurrencies
Fundamental analysis is also possible in the encryption industry. This must Start with a broader view From the market, which starts with a macro perspective. the precise The offer should include things like the Federal Reserve and others Factors.
Under that, you can too Perform an analysis on the series, where you can take a look at the major trends in selected cryptography. There are many on-chain metrics that you can look at when analyzing cryptocurrencies.
Some of the most important metrics to consider are number usersAnd incoming and outgoing exchange flowsmoney inside and out, Transaction volumeThe exchange reserve and the network value of the transaction.
Related “ Fundamentals analysis in forex
Combine technical and fundamental analysis
A basic rule Many day traders The use is that they are Combine fundamental and technical analysis. This is where they use the two together in a trade to predict the next price move. Technical analysis is where a trader looks at the charts and determines the next price move.
A good example of this is shown below. In this chart, We can use the basic analysis Focus on things like earnings and the Federal Reserve.
If you think the Fed will continue to raise rates, you can use Technical analysis to find key levels to watch, including $3,641 and $3,494. For this trade, the stop loss will be at $4,195 and $4,331.
Make a plan
To master the art and science of fundamental analysis, You must have a plan! This plan will help you learn how to trade when the data is released.
Some traders like to be on the sidelines when the data is released. They do this for the simple reason that they cannot accurately predict what data will be released.
On the other side, There are traders who like to trade when data is released. They do this due to volatility This usually happens after the data is released.
The best thing to do is create a plan And you know how you’re going to trade on this.
We have adopted a very simple method of trading when economic data or earnings data is released. We always stay out of the market two hours ago The data is released. Next, we enter specific assets 30 minutes after the data is released.
At that time, we can confidently predict which direction the asset will go.
the key To succeed in fundamental analysis is an experience. In this, The more time you spend studying and analyzing Market behavior after the release of the data better for you.
Economic calendar and earnings
the Earnings and Economic Calendars They are two factors that are used by investors and traders. To be successful in this type of analysis, you must first know when different data are released.
Both calendars can help you know when to expect the data to be released. As a trader, we recommend that you visit the economic calendar in the weekend. This will help you plan your trading for the following week.
Related ” Wise traders should believe in analysis, not prediction
The best primary data sources
As a day trader who uses fundamental analysis, you will need good access to fundamental data. Fortunately, there are many sources of this information, including:
- Investing.com Investing is a well known site that provides all kinds of basic data such as economic and financial calendars, IPOs and stock splits.
- Find Alpha (SA) SA is a leading publisher of financial content for thousands of authors from around the world. It also provides other important tools such as instant news and calendars.
- bloombergAnd CNBCAnd Wall Street JournalAnd FT – These are the largest sellers of financial information. As a trader, you must make sure to check them every day.
- Barchart.com Barchart is an excellent site that gives you access to quality analysis tools.
Another good solution is Watch TraderTv Live on Youtube!
Final thoughts
Fundamental analysis is One of the three types of analysis in financial trading. The others are technical analysis and sentimental analysis. Having a good understanding of the strategy will help you become a better day trader and swing trader.
To master this analysis, you need three things:
- Know when relevant data will appear
- Learn how to interpret the data
- How to trade using the data shortly after and before it is released
Also, remember that The way you trade will not always work. You should learn to embrace that, too.
And you? Do you prefer fundamental or technical analysis? Do you have other methodologies to suggest? Let us know in the comments!