What You Need to Know About Fundamental Trading

Whether there is an upcoming economic data release, the earnings season, or an important announcement to be made by a central bank, many traders use these opportunities to capitalise on short-term volatility. The following sections discuss some of the main aspects of fundamental analysis and why you should consider it.

What Is Fundamental Analysis?

Fundamental analysis is based on a granular overview of social, economic, and political forces that might impact the demand and supply of a given market or financial asset. For example, when the Bank of England releases its monetary policy decisions, the volatility of the currency market, particularly GBP pairs, is expected to increase.

Fundamental analysis is often associated with a long-term strategy, according to which you can select the most profitable stocks based on their financial performance and stability using data from financial statements (i.e., earnings per share, operating cash flow, and others). However, several types of short-term traders use fundamental analysis to gain profits in a relatively short period.

These are a few examples of fundamental indicators that you may use to make trading decisions:

  • Corporate events, such as earnings reports
  • Stock splits
  • Acquisitions or mergers
  • Reorganisations
  • Political factors (i.e., regulations)
  • Economic reports releases

How Does Fundamental Trading Work?

Firstly, you need to choose an online broker for stocks trading and create an account. Then, you should find assets aligned with your trading strategy and follow the news that might impact them.

For instance, the most important moment for equity trading is when the chosen company releases statements mentioning whether they managed to exceed, fail or meet the market’s expectations. Trading occurs immediately after this announcement – if the earnings exceed expectations, the share price will increase, or decrease in case the actual performance is poorer than expected.

Is Fundamental Trading for Anyone?

In general, fundamental analysis is used by value or long-term investors to identify underpriced assets or those with growth prospects. It is also used by analysts to generate buy, hold, or sell recommendations for investors.

On the other hand, technical analysis is ideal for short-term trading, where you can identify patterns on price charts, such as upward or downward trends. Technical traders do not necessarily seek to buy and hold assets, while fundamental investors might seek to create a long-term portfolio.

Fundamental analysis is not only for stock trading. If you decide to use an economic calendar, you will be aware of the coming events that may affect other markets. For instance, the NFP (Non-Farm Payroll) report is released in the US and it shows the state of the economy by indicating the number of jobs. Because of this, it can significantly move the currency, equity, commodity and other markets, creating trading opportunities.

Depending on your chosen strategy, you can use fundamental analysis to open positions ahead of such news, based on your expectations. In general, if the reports released have better-than-expected indicators, you will benefit from opening a long position; otherwise, you can short your assets and capitalise on the price decrease.

Summary

In most cases, traders and investors use a combination of different factors to evaluate their assets according to a well-defined strategy. Fundamental analysis can be used to identify opportunities on the equity, currencies, commodities, and other markets affected by economic, social, or political forces.