Fundamental Analysis

Fundamental Analysis

Fundamental analysis is used to predict the future movement of security prices, and often includes examining economic and political factors. Supply and demand figures are considered important for fundamental analysts. Most market traders use a combination of technical analysis with fundamental analysis to create a trading strategy. However, technical analysis has special merit, as the technical analyst can follow a lot of markets and market instruments, while the fundamental analyst needs to constantly watch the market.  Fundamental analysis focuses on what should happen in the market based on current economic and political factors. These factors include supply, demand, weather patterns, and governmental policy.

The fundamental analyst studies the reasons for market movement, while the technical analyst studies price patterns and historical data. Fundamental analysis is a strategic assessment of the current price of a security. Currency valuations are correlated with a country’s overall economic health, monetary policy, regional stability, and budgetary decisions.  Traders can greatly benefit from understanding the current economic environment prior to the release of economic information.

Economic awareness is important for traders in both the stock market and Forex market.  However, fundamentals analysts and traders in these two different markets have dissimilar approaches towards effective trading strategies.

For traders in the stock market, it means analyzing financial statements of companies and finding the real value of stocks to predict future cash flows and profits. For the currency market, it involves focusing on interest rates, economic growth, and inflation, which are influenced by economical, social and political factors.

Fundamental Analysis is a tool used by investors when choosing investment strategies.  Stock market participants will try to find miss-priced (under valued or overvalued) stocks and attempt to capitalize on them. This market behavior will cause the demand or supply level to change, thereby driving the stock price up or down to its real value.