Fundamental Analysis

What Is Fundamental Analysis?

Fundamental analysis is analyzing factors that can impact the asset price now or in the future. This type of analysis depends on analyzing the current and external events, as well as economic data, and sector’s development.

 Fundamental analysis is one type of two to approach markets, the other method is technical analysis.

 Fundamental analysts look at factors that are driving the prices, unlike technical analysts who look at charts and other technical indicators to determine what is next.

Examples for fundamental analysis

You can find multiple tools and techniques to approach fundamental analysis, but mainly there are 2 ways: first top-down analysis, a wider look on economy, starting by looking at the market as a whole, before focusing on a sector or an industry related to the asset, second, bottom-up analysis, starts from the narrow view to a wider one.

Benefits

Fundamental analysis is used to evaluate stock prices, but it can be used across a wide array of asset: stocks, bonds, Forex, commodities, and indices.

 Fundamental analysis tools differs from one trader to the other depending on the type of asset. 

For example, while analyzing stocks some look at the: revenue, earnings per share (EPS), expected gross, and margins. 

Meanwhile in forex, traders use economic data issued from central banks, that speaks of the economic stability of the country.

Pros

  • Fundamental analysis helps gather accurate information by investors and traders, these information guides them to making the right decision. By this data there is no much space for personal points of views.

  •  A fundamental analysis cannot identify an entry or exit points, but it helps with understanding the asset’s value, and to see the market on the long term. When the trader understands the asset value, he can compare that to the current value, and determine if it is the fair value or not. The goal here is the ability to benefit from market correction moves.

Cons

  • Fundamental analysis takes longer, requires multiple aspects of analysis, which can lead to a truly complicated analytical process.

  • Fundamental analysis takes longer, so some conclusions are no longer valid to make quick decisions. For those who look for entry and exit points, it is better to use technical analysis.

  • It is also really important to choose the best scenarios. Fundamental analysis helps develop a closer look to the market, but any sudden political or economic changes lead to price actions.

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