The fundamental analysis is based on an in-depth and all-around study of the underlying forces of the economy, providing data that can be used to predict future prices and market developments.
Fundamental analysis consists of: the analysis of the economy as one unit, the analysis of a particular industry or that of an individual company.
Three sources of profit:
1. Your fellow traders
Mainly those who are less knowledgeable, less experienced, or simply too slow on the draw. Here you can profit by applying better trading skills and a better trading system.
Initial public offerings give you the chance to profit by the difference between the price of the stocks being public for the first time and the prices at which they will eventually settle. As a trader, your earnings will be well-deserved compensation for the risk you take on.
3. Moves of big companies
Big companies moves big in the financial markets, and play a role as portfolio builders for investors and traders. In this case, a trader’s profit will act as compensation for the risks taken.
Fundamental analysis uses the impact of financial events and news on the prices of financial instruments. When it comes to stocks, it takes into consideration public data like revenues, earnings, future growth, return on equity to determine the future potential of the company. Economic Calendar is one of the tools which provide you with the financial events which are sure to happen.
It represents a qualitative measure of the trader’s mood toward financial markets in general, or specific instruments in particular. Good mood to invest or a bad mood to stay away from the market impacts the state of the markets in the long term. Sentiment analysis is also the overall public opinions, feelings or approach that create the market psychology.
Fundamentals and Sentiments
While technical analysis guides traders with what is most likely to happen based on the past of the asset. Certain past patterns and behaviour of the asset under certain circumstances guides traders how the asset might behave in the future. On the other side, fundamental analysis is focused on the macro view of the market, considering the news, events, geopolitical issues, trading policies between countries, fees and restrictions.
🡆 It is a method of evaluating the real value of an asset, identifying and analysing the factors that may impact the price in the future.
🡆 This analysis is based on outside influencers, financial statements and industry trends.
🡆 There are many tools which can be used to perform an accurate fundamental analysis, which are categorized into two types: top-down analysis (take a wide view of the economy, down to a sector, industry and finally to the company) and bottom-up analysis (starts with a particular stock and go wider to factors which may impact the price.
🡆 Fundamental analysis depends on financial data, events, news and leaves no room for personal biases.
🡆 It refers to the traders appetite to take risks.
🡆 Day traders and technical analysts support their decisions on this analysis.
🡆 The sentiment is about the emotions or feeling how the traders think and feel the market will move.
🡆 Well-known sentiment indicators are the CBOE Volatility Index (VIX), High-Low Index, Bullish Percent Index (BPI) and moving averages.