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Fundamental Analysis

Fundamental analysis (FA) is a type of trading analysis that relies on finding the intrinsic value of an asset. Fundamental traders believe that markets seldom reflect the true price of an instrument, and that this true price can be found by analysing earnings, reports, releases, macroeconomic data, and more.

In essence, FA is about looking at the bigger picture and diving deep. As such, fundamental traders often prefer mid-to-long-term strategies like swing trading and position trading.

How does Fundamental Analysis work in practice?

Fundamental analysis places an emphasis on inspecting markets rather than actively trading. A fundamental trader will thoroughly investigate any instrument they trade and try to understand the factors that make it move, its history, and how it works in specific conditions. The favoured tools and sources for fundamental traders differ depending on their preferred asset class.

How does Fundamental Analysis work in practice?

Fundamental analysis places an emphasis on inspecting markets rather than actively trading. A fundamental trader will thoroughly investigate any instrument they trade and try to understand the factors that make it move, its history, and how it works in specific conditions.

The favoured tools and sources for fundamental traders differ depending on their preferred asset class.

In forex, fundamental traders use:

  • Monetary policy reports
  • GDP
  • Inflation data
  • Labour information
  • Trade balances
  • Interest rate differentials

Key concepts and tools for
Fundamental Analysis

Intrinsic Value

The intrinsic value of something is the true value of an instrument, determined by its performance within a wider economic context. This includes its performance compared to competing and similar assets. The intrinsic value doesn't need to be an exact number, just an approximation of whether the instrument is undervalued or overvalued.

News

Economic and political news can change the price of an asset rather quickly. As such, fundamental traders keep a close eye on the news cycle to identify any events that may affect their prior analysis and change their prediction regarding an instrument's intrinsic value.

Policy and Global Events

Some of the most influential releases for fundamental analysis are policy changes, major political events, conflict, and geopolitical tension. Announcements from officials, elections, changes to monetary and economic policy, war, and supply line disruptions cause major shifts in prices. In such cases, fundamental traders need to be quick to re-evaluate their positions.

Industry and Sector Trends

No asset exists in isolation. Fundamental analysts need to understand the direction of the countries, industries, and sectors their assets are a part of. Unlike technical analysis, this doesn't refer to flash-in-the-pan price trends, but rather long-term orientation.

Key concepts and tools for Fundamental Analysis

Intrinsic Value
The intrinsic value of something is the true value of an instrument, determined by its performance within a wider economic context. This includes its performance compared to competing and similar assets. The intrinsic value doesn't need to be an exact number, just an approximation of whether the instrument is undervalued or overvalued.
News
Economic and political news can change the price of an asset rather quickly. As such, fundamental traders keep a close eye on the news cycle to identify any events that may affect their prior analysis and change their prediction regarding an instrument's intrinsic value.
Policy and Global Events
Some of the most influential releases for fundamental analysis are policy changes, major political events, conflict, and geopolitical tension. Announcements from officials, elections, changes to monetary and economic policy, war, and supply line disruptions cause major shifts in prices. In such cases, fundamental traders need to be quick to re-evaluate their positions.
Industry and Sector Trends
No asset exists in isolation. Fundamental analysts need to understand the direction of the countries, industries, and sectors their assets are a part of. Unlike technical analysis, this doesn't refer to flash-in-the-pan price trends, but rather long-term orientation.
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All trading involves risk. It is possible to lose all your capital.

All trading involves risk.
It is possible to lose all your capital.

Fundamental Analysis Pros
and Cons

Fundamental Analysis
Pros and Cons

  • Pros
  • In-depth
  • Gives clear context
  • Long-term perspective
  • Less need for active trading
  • Feels controlled
  • Cons
  • Markets sometimes react to events before news comes out to the wider public
  • New events can invalidate previous analysis
  • Requires a firm grasp of global and local economy concepts
  • Delayed results make performance analysis difficult
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