When we talk about the Fundamental Analysis, it would be simplistic to face it by not comparing it to Technical Analysis. Therefore, we will try in this our guide, to face the Fundamental Analysis in the best way, underlining its great importance also thanks to the comparison with the technical analysis.
Unfortunately, many people blindly trust technical analysis, therefore following the suggestions of trading signals blindly, without consulting even a minimum fundamental analysis.
Many people are in fact convinced that the only thing to follow in financial markets is technical analysis, and that it is the best way earn money. However, we see the differences between technical and fundamental analysis, with an eye to the latter.
Professionals usually look at fundamental analysis as the most logical and pragmatic way to invest online in the most professional way possible, by analyzing the financial stability of a company or a nation. The technical analysis, however, says a lot about the psychology of the market, because it analyzes the past market movements, to try to predict future movements.
For example, you can buy shares of a company that is fundamentally very promising, but if the stock is already very expensive, we might find ourselves in the middle of a retracement, something that could have been very probably avoiding thanks to the use of technical analysis.
Fundamental Analysis: how it works
If you intend to use fundamental analysis to invest your money, you must first use a variety of metrics, which will help you invest in the best possible way.
Although the name Fundamental Analysis may contribute somehow to instill fear, there is still to be reassured, as it is something that is actually much simpler than it seems. To operate in the forex world, but also in stock markets, indices, ETFs and any other type of financial market, it is first necessary to know how the economy works. So do not be ashamed to buy at least a macroeconomics book.
In order to operate profitably and serenely in the forex market, it is necessary first to have a general perspective on how the financial markets work. Trading forex has a higher level of difficulty than binary options, where you can only follow the online trading signals to trade.
Fundamental analysis: what is it?
The fundamental analysis, together with the technical analysis, is a study carried out on the financial markets, aimed at evaluating the price of an asset, taking into consideration the economic, macroeconomic and financial aspects of the market to which it refers.
As far as the share market is, concerned, fundamental analysis takes into account some factors such as profits, capitalization, P / E ratio and many other factors. In the Forex it is essentially all simpler, since mainly macroeconomic factors (the so-called “macro” data) that inevitably have a large impact on the economies of a community or a country, and therefore inevitably also on the reference currency of that nation.
The fundamental analysis of forex takes into consideration the factors that are essentially in everyday life. They are facts of the real economy, such as house prices, prices of necessities and consumption, the rate of employment and unemployment, and much more. These are values that are reported daily in the various financial news, values that influence our everyday life. Being updated in the world of online trading is almost essential, as the best results are often obtained thanks to macroeconomic news, and through the opening and closing of their positions in conjunction with these events.
For example, a change in monetary policy by the Federal Reserve will greatly affect the value of the US dollar (USD).
Not only big banks affect Forex, but even each country. An example would be the Brexit, which has sent the value of the pound to the lows of the last decades, right after the referendum vote. A macroeconomic event such as Brexit affects third-party investments in the UK economy, as well as employment, GDP, and of course the price of Pound.
In the world of fundamental analysis, there are also the so-called Rumors, or rather unofficial indiscretions, which can be forecasts that affect the trend of the markets, and are part of the large family of fundamental analysis.
Fundamental Forex Analysis
Now that we have understood in general how fundamental analysis works, and we have finally understood that the fundamentals are part of every person’s life, influencing it in a sometimes brutal way, we can now find out specifically what are the various factors that are involved when fundamental analysis is performed. Here are the most important economic indicators, with the explanation.
- GDP or Gross Domestic Product (GDP): Gross Domestic Product (GDP) is undoubtedly the most important macroeconomic indicator, and is a key indicator of the health of an economy.
- Industrial Production: Industrial production is an indicator that measures the change in the total production of companies, factories and public services.
- Durable Goods Orders: The change in this important index makes it possible to predict the level of business activity, thanks to the new orders for durable goods for the following months.
- Retail Sales: Retail Sales are one of the most important indicators for a country’s health status. Retail sales are essentially a monthly measurement of all assets that have been sold by retailers in South Africa.
- Business Inventories: This is a very important macroeconomic value. The business inventory report provides the value of new industry orders for durable goods and consumer goods.
Other important indicators:
- Wholesale Trade;
- Unemployment Rate;
- Wholesale Trade;
- Interest rate;
- Factory Orders;
- Personal Income;
- PCE or Personal Spending, Personal Consupione Expenditure or Personal Expenditure);
- Trade Balance;
What is fundamental analysis, explained in simple words?
Fundamental analysis is a method of evaluating a market in an attempt to measure its intrinsic value by examining qualitative and quantitative economic, financial and other related sectors. Fundamental analysts study everything that can affect the value of the market, including macroeconomic factors, such as the general conditions of the economy and industry, and microeconomic factors such as financial and business management conditions. The ultimate goal of the fundamental analysis is to produce a quantitative value that an investor can compare with the current price of an asset, thus discovering whether the market is undervalued or overvalued.
Fundamental analysis determines the health and performance of a company or an economy by observing and studying financial data and economic indicators. The aim is to identify the most stable and strong companies and economies (and their currencies), and to identify even the least stable and weakest companies. Investors buy companies and currencies that are strong, and sell companies and currencies that are weak. This method of market analysis is considered the opposite of technical analysis.
The fundamental analysis uses public and real data regarding the evaluation of the value of an asset. Although most analysts use fundamental analysis to assess equities, this valuation method can be used for any type of market, such as forex. For example, an investor who can perform fundamental analysis of the value of a bond can inquire about economic factors such as interest rates and the general state of the economy. Information on the bond issuer can also be observed, as well as potential rating changes.
As for markets other than Forex such as equity, this method uses data on revenues, earnings, future growth, return on capital, profit margins and other data to determine the value of a company’s stock and its potential for future growth. The fundamental analysis focuses on the company’s earnings as the primary object of evaluation.