As investors begin to follow the financial markets, they quickly become aware that there are many factors that create the ebb and flow to the short and long-term market movements. Prices of financial instruments move based on the market sentiment which is a function of supply and demand for a financial product. Successful trading is based on the ability of an investor to analyze the financial markets and determine when the price of an instrument is relatively high or low. The two main types of analysis that are used in determining the future price of a financial instrument are fundamental and technical analysis. These two types of analysis can be used independently or in conjunction with one another. It is important for an investor to understand both types of analysis and be cognizant that each analysis plays an important role in describing the future movements of the financial markets. The goal of this article is to introduce the reader to some basic fundamental analysis.

Fundamental Analysis:

Fundamental analysis is the process of using economic, financial, or political news to determine the future movement of the markets. Fundamental analysts will pour over numerous reports and releases to try to gain some insight into the future direction of the markets. For example, analysts will make predictions on the direction of finances based on economic news such as Gross Domestic Product or Central Bank announcements. Equity analysts will look at how a company performed over a specific quarter or what a CEO has recently stated to gain some insight into the future direction of a stock. It is important to be aware of what is happening in the world, since financial instruments like currencies, over the long term, reflect the state of the country in which the currency is used. Every day there are economic releases around the world that reflect new information that determines the path that a fundamental analyst will need to examine.

Fundamental trading is a type of discretionary trading. This means that the rules the fundamental trading analyst employs are subjective and can change based on the trader’s discretion. When a fundamental analyst examines recent news, he or she must also be able to determine if the news or events are currently priced into the market for a financial instrument. For example, if the expectations for an economic report such as the employment number are for a slight reduction in employment, does a small surprise make a difference over the short, medium, or long term? The analyst will have to determine based on consensus estimates and their own estimate if the market has previously correctly valued an instrument when determining if there is an opportunity to take a position. Generally, when a market is surprised by some new fundamental news, the market reaction is immediate. After participants absorb the new news, the markets will continue to move in the direction of the initial reaction over a period of time.

As the fundamental trading analyst practices investing in the financial markets, he will begin to understand the different fundamental news releases that are important and those which expose the markets to noise. A fundamental analyst should keep track of how the market move on certain economic releases is an important guide to performance within fundamental trading. It is very difficult to be a fundamental analyst that specializes in all the markets. Each market has numerous nuances that create subtle and large changes in the direction of a financial market.