What does fundamental analysis mean?
Fundamental analysis is a technique that looks at key economic and financial numbers to determine whether a financial asset is a buy or a sell.
Economic numbers like the nonfarm payrolls, interest rate decision, manufacturing and services PMIs, and retail sales can help you know whether you should buy or short a currency pair.
Similarly, the weekly crude oil inventories and oil rigs can tell you whether oil is a good investment or not.
In stocks, data like earnings and news like mergers and acquisition or the departure of a CEO can help you determine whether to buy or sell an asset.
The opposite of fundamental analysis is technical analysis. This is simply the process of using technical indicators like moving averages, relative strength index (RSI), and the awesome oscillator to determine entry and exit points.
Fundamental analysis is a useful process used by all types of traders. However, it is usually more useful for swing and long-term traders. In most times, scalpers rarely use it because they are usually not interested in the main numbers.
However, ordinary day traders use fundamental analysis when planning their trading strategies. For example, day traders who rely on volatility tend to use fundamental data to predict when movements will be higher. That’s because, the market is usually more volatile when key numbers are released.
In this article, We will write on the best way to master the art and science of fundamental analysis.
Economic data is one of the most important aspects in fundamental analysis. This data is usually released by various governmental and private sector agencies. Its goal is to show whether the economy is strengthening or not.
For example, the non-farm payrolls data show the number of people different sectors of the economy are adding or reducing. Investors and traders use this data to know whether to invest in the country or stay away.
Another example of economic data are Company’s earnings or the crude oil inventories. These inventories show crude oil investors the trends that are going on in the oil market and how to invest, going forward.
As a trader, it is therefore very important to understand the different types of economic and company data, when they are released, their relevance, and how to trade when they are released.
Economic and Earnings Calendar
The earnings and economic calendars are two influential items that investors and traders use. For you to be successful in this type of analysis, you must first know the time when different data is released.
The two calendars can help you know when to expect the data to be released.
As a trader, We recommend that you visit the economic calendar at the end of the week. This will help you plan your trading for the following week.
Create a plan
To master the art and science of fundamental analysis, you must have a plan! This plan will help you know how to trade when the data is released.
Some traders love to be on the sidelines when the data is released. They do this for the simple reason that they cannot predict accurately the data that will be released.
On the other hand, there are traders who like trading when the data is being released. They do this because of the volatility that is usually happens after the release of the data.
The best thing for you to do is to create a plan and know how you will be trading in this.
We have adopted a very simple way of trading when the economic or earnings data is released. We always stay out of the market two hours before the data is released. Then, we enter certain assets 30 minutes after the data has been released.
At that time, we can confidently predict the direction the asset will go.
The key to success in fundamental analysis is experience. In this, the more time you take to study and analyze the market behavior after the data is released the better it is for you.
Best sources of fundamental data
As a day trader who uses fundamental analysis, you will need to have a good access to fundamental data. Fortunately, there are many sources of this information, including:
- Investing.com – Investing is a well-known website that provides all types of fundamental data such as economic, financial, IPO, and stock split calendars.
- SeekingAlpha (SA) – SA is a major publisher of financial content from thousands of authors from around the world. It also provides other important tools like instant news and calendars.
- Bloomberg, CNBC, WSJ, and FT – These are the biggest vendors of financial information. As a trader, you should make a point of checking them out every day.
- Barchart.com – Barchart is an excellent website that provides you with access to quality analysis tools.
Another good solution is to watch TraderTv Live on Youtube!
Fundamental vs technical analysis
As mentioned above, fundamental and technical analysis are different from one another. While fundamental analysis refers to the study of economic and financial data, technical analysis is the use of technical tools to help you determine entry and exit levels.
In most cases, technical analysis is used by day traders and scalpers while fundamental analysis is mostly used by long-term and swing traders.
Fundamental analysis is one of the three types of analysis in financial trading. The others are technical analysis and sentimental analysis. Having a good understanding of the strategy will help you become a better day and swing trader.
To master this analysis you need three things:
- Know when the relevant data will come out
- Learn how to interpret the data
- How to trade using the data soon after and before it is released
Also, remember that the way you trade will not always work. You should learn how to adopt to that too.
And you? Do you prefer fundamental or technical analysis? Do you have other methodologies to propose? Let us know in the comments!