- Fundamental analysis relies on economic data and news events to make market predictions
- It can be used in isolation when news trading or in tandem with technical analysis
What Is Fundamental Analysis?
If you don’t have a head for charts and find technical indicators stressful, fear not: there is more to trading analysis than the technical analysis! Fundamental analysis is the study of markets through economic data and news events. Essentially, traders take a broader view of economic, social, and political factors that can affect the price of assets outside of the charts.
At the heart of fundamental analysis are the principles of supply and demand. Any developments that influence this balance are likely to move prices in the respective markets, so traders look for macroeconomic and geopolitical clues for market movements. We call these economic indicators.
Different economic indicators will be relevant for different assets, as shown below:
- Forex Market: Economic indicators include central bank announcements, employment data, inflation figures, interest rates, and balance of trade.
- Stock Market: Economic indicators include company earnings, employment, revenue, profit margins, (known as bottom-up analysis) as well as global or national policies that might affect the company’s sector (top-down analysis).
- Crypto Market: Economic indicators include regulatory policy on the industry, institutional adoption, project metrics and blockchain performance.
Overall, economic indicators fall into two different categories:
- Quantitative indicators, i.e. data given in numerical values. This includes statistical information such as inflation figures or employment rates for forex, company earnings and revenues for stocks, or market capitalization for crypto.
- Qualitative indicators, i.e. non-numerical data related to quality or sentiment. This includes general economic outlook for forex, company reputation for stocks, or institutional integration for cryptos.
How Does Fundamental Analysis Differ From Technical Analysis?
Technical analysis is concerned with price movement and relies on historical chart data to make future predictions. It is not concerned with uncovering the intrinsic value of the underlying asset; only whether the price could go up, down, or sideways.
Generally, fundamental analysis is similar in that it helps traders anticipate upcoming movements and place their trades accordingly. However, unlike the technical approach, fundamental analysis seeks to divine the intrinsic value of the asset according to broader market context. Chart data is not relevant here, except in the way that it reflects market sentiment. Rather than searching for technical patterns or statistical signals, fundamental analysis requires traders to monitor the news and economic or financial data releases.
The contrast in perspective offered by these methods of analysis means that they are suited for different time frames. Technical analysis is most useful for short-term trading strategy and pinpointing trade entries or exits. Fundamental analysis is more useful for choosing assets in the first place, for monitoring market trends in the long-term and for critiquing general prospects.
Economic Events That Move The Markets
Economic events that move the markets come in two categories: regular and recurring, and anomalous, one-time events. News items can affect entire economies, specific industries, or individual assets.
Regular or Recurring
These are scheduled releases of economic news according to a calendar. Examples include:
- Central bank announcements
- Unemployment numbers
- Non-farm payrolls (US)
- Manufacturing reports
- Consumer Price Index
- Producer Price Index
- Adjustment of Interest Rates
- Gross Domestic Product reporting
- Balance of Trade
- Company Earnings Reports
These events can be tracked via online Economic Calendars, which list each day’s important events across the globe along with the relevant currency affected. Additionally, most calendars also grade events low, medium, or high importance according to the volatility expected.
Some major macro events tend to be especially influential and can send shockwaves through forex, stock, and even crypto markets simultaneously. For instance, traders should note that US events, especially Federal Reserve announcements, tend to hold particular sway over the markets. This is due to the prevalence of USD in forex and crypto markets, and the knock-on effect that economic policy has on business and trade for companies.
One-Time or Anomalous
These are unexpected events; unfortunately, they tend to be bad rather than good, such as:
- Natural disasters
- Geopolitical conflicts
- Terrorist attacks
- Industrial action
- Company default or liquidation
Typically, negative news spooks traders from the markets and cause prices to drop. Sometimes, this is simply a knee-jerk reaction due to uncertainty, because markets frequently rebound when the immediate threat has passed and traders have had time to reassess the situation. With this in mind, you shouldn’t panic if you are caught out by an “act of God” event. In actual fact, it may only prove to be a short term correction and even a chance to “buy the dip”.
Trading The News
‘Trading the news’ refers to traders positioning their strategy around news events in order to make the most of breakout movement. This requires careful planning as well as discipline in the excitement of the moment:
- Keep a dairy of economic events: Use an online calendar to familiarize yourself with upcoming events and do your research in advance. It helps to be familiar with forecasted values so you can anticipate traders’ potential reactions.
- Plan your trades in advance and avoid acting on impulse: Make a strategy and stick to it. This gives you time to double-check if you’ve forgotten anything and prevents rash decision-making. It is also easier to remember what you did and to learn from your success or mistakes in future!
- Keep things in perspective: As with technical analysis, you should avoid information overload. Learn to differentiate between key news pieces and short-term ‘noise’, and do not panic if markets do not react the way you anticipated. If everything was guaranteed in trading, everyone would be rich!
- Manage your risk: Consider trading in smaller volumes or with reduced leverage to minimize the risk of significant losses.
When a news item affects an asset, we tend to see price volatility rise, sometimes producing sudden movement in one direction. This is caused by high volumes of trades being placed in a concentrated period as traders all rush into the market at the same time. In these cases, we see how strongly fundamentals shape overall market sentiment when it comes to moving prices.
Using Fundamental and Technical Analysis Together
Overall, fundamentals tell us that the markets are going to move, but do not tell us precisely how. This is where traders can also benefit from technical analysis to pinpoint their pending orders and organize their trade positions. Studying chart patterns and using technical indicators can help traders with the timing of their strategy to:
- Use pending entry orders: During period of high trading volume, slippage and market gaps are liable to occur, so traders are advised to place trade entries in advance.
- Position and adjust stop losses & take profit orders: Ensure your exit is also secure and that you are protected against adverse price movement.
- Monitor trades more regularly: Now is not the time to neglect your trades. Keep an eye on fluctuations and trends until you close your positions.
It should be clear that fundamental analysis, like technical analysis, offers valuable tools for every kind of trader. However, technical or economic, no type of indicator is 100% foolproof; successful trading depends on your interpretation of the signals given and your containment of risk. For this reason, the integration of different kinds of analysis (fundamental and technical) will make your strategy more resilient in the long term and up to the moment a trade is placed.
What is Fundamental Analysis?
Fundamental analysis is the study of markets through economic data and news events. Essentially, traders take a broader view of economic, social, and political factors that can affect the price of assets outside of the charts.
Any developments that influence the balance of supply and demand are likely to move prices in the respective markets. As a result, traders look for macroeconomic and geopolitical clues, known as economic indicators, for market movements.
What's The Difference Between Fundamental and Technical Analysis?
Technical analysis is concerned with price movement and relies on historical chart data to make future predictions. It is not concerned with uncovering the intrinsic value of the underlying asset; only whether the price could go up, down, or sideways. Fundamental analysis also helps traders anticipate upcoming movements and place their trades accordingly. However, unlike the technical approach, fundamental analysis seeks to divine the intrinsic value of the asset according to broader market context. Chart data is not relevant here, except in the way that it reflects market sentiment.
Generally, technical analysis is more suited for short-term analysis and immediate time-frames, whilst fundamental analysis is better for long term market outlook.
What Are The Different Types of Economic Indicators?
Economic indicators can be divided between recurring and scheduled events, and anomalous, freak events. The former describes governmental and institutional data releases such as interest rate adjustments, inflation reports, company revenue reports, or employment figures. Traders can keep track of these announcements with an Economic calendar. In the case of anomalous events, however, markets may be unexpectedly disrupted by ‘force majeure’ circumstances. Examples include natural disasters, geopolitical conflict, or a global pandemic.