Fundamental Analysis

Don’t Invest Without It!

Tue, Jun 8, 2010 - 10:50am

If you like to trade online, or if you already do, fundamental analysis is surely one of the best tools that you could ever acquire as a retail trader.

Fundamental vs. Technical Analysis

It is true that technical analysis offers a large selection of choices and approaches for the analysis of markets and the formulation of strategies but, in many cases, these choices are arbitrary and lack any logical foundation on economic events that clearly form the basis of almost every long-term market movement. Fundamental analysis, on the other hand, addresses this problem by focusing on the economic factors that influence the availability of funds to traders, and their emotional responses to market events.

Fundamental analysis can be divided roughly into two branches:

  1. Economic analysis, where traders must perform calculations, examine charts, and determine overarching patterns that influence the long-term changes in markets such as interest rates, unemployment numbers, the legislation on financial issues, as well as government economic policies, and technological developments.
  2. The social and political aspect of analysis. Here traders must consider a large number of diverse matters that may not always be relevant at first sight, but nonetheless assume overwhelming value from time to time. Climate change, political turmoil, social events on a large scale, the evolution of cultures and beliefs over a period of time are examples in this regard.

Economic analysis often confuses traders at first sight. It is based on rather simple and general principles that almost always work as expected but with the time factor remaining highly unpredictable. The speculator George Soros, for example, was able to make great profits on some of his ambitious bets in the 70s as currency pegs collapsed but he was also handled roughly by the markets as he failed to anticipate the 1987 crash in a timely fashion. Indeed, there are many financial gurus who predict doom and gloom many times over during their careers but are only proven to be correct once or twice.

That brings me to the main weakness of fundamental analysis: it can tell us why and how some development may occur and give us a fairly good idea of its scale as well, but it is often useless in defining the timing of any event. This is due to the fact that markets act on fear or euphoria and it is exceptionally difficult to determine when these feelings lead speculators to analyze a piece of data asset and assess its value correctly.

The best forex broker will present a choice of both technical and fundamental tools to you, and even offer you a combined approach to analysis if that is what you request.

Never discard fundamental analysis just because it’s not very popular. It has worked wonders for most of its practitioners, and there is no question that you, too, may benefit from it greatly if you apply it with discipline.

About the Author

Bryan Sayers