What is Fundamental Analysis? - Fundamental vs Technical Analysis
Do you know why many novice investors lose money? Many times it's because they don't analyze the market they choose to trade.Fundamental analysis is one of the means which traders use to forecast financial markets all over the world. These days, several websites give fundamental analysis information.
This shows that fundamental analysis is a dependable form of market analysis. Generally, any seasoned investor would know a thing or two about fundamental analysis even though they do not use it. Precisely, some of the most common types of investors involved in fundamental analysis are Forex traders and cryptocurrency traders.
You can apply the knowledge of fundamental analysis to stock, currencies, and commodities such as oil, silver, and gold. In this piece, we will discuss the fundamental analysis, how it works, and why you should use it. An alternative to fundamental analysis is technical analysis.
You will understand how these two methods of forecasting financial markets compare. To get a good grip on the comparison, we will throw in the advantages and disadvantages of each method analysis. Do you know what fundamental analysis entails?
What is Fundamental Analysis?
If you believe in numbers and statistics,fundamental analysis might not be for you. Fundamental analysis doesn't involve clumsy figures and charts that dissect the market. Hence giving you a deep insight into market analysis. Rather this method of financial market forecast lets you see the big picture of the market. This makes fundamental analysis useful for long term market forecast.
How Does Fundamental Analysis Work?
To have an idea about how fundamental analysis works, you should take a look at the chart of any currency pair, a fundamental analyst can tell the general trend of a market by merely looking at the chart. In fact, anybody with a little bit of knowledge can see this general trend in a currency pair. Like we mentioned briefly, fundamental analysis is more accurate when forecasting financial markets.
Why Use Fundamental Analysis?
When trading, long-term signals are more reliable than short term ones. Hence, investors can put their minds at rest when they implement it. On the other hand, technical analysis is better for day traders who trade shorter time frames.
Components Of Fundamental Analysis
If you search for components of fundamental analysis, you would find various ideas on the matter. Some categorize it as three components namely:
However, there are simpler ways to categorize the components of fundamental analysis. Without further ado, here they are:
Whether you're trading stocks, currencies, or commodities something is constant. The price will always print a pattern. Analysts can make predictions by tracking back in the market charts. With some knowledge of fundamental analysis, you would be able to make market forecasts by investigating previous events in the market.
Many traders must have raked in funds enough to sustain them for a lifetime by utilizing this component of fundamental analysis. If a company with lots of financial power makes an announcement, the news media is likely to pick it up. So, on seeing such news, traders can make profitable short term trades. However, traders do not even need to wait for the news to get top economic info.
There's something called the economic calendar. And economic activities for every day are listed there. Economic activities with high impact affect the market significantly and traders can make profits by engaging them.
This sounds similar to market history but it's different. While history involves the entire aspect of the market, price action is how high or low the prices have been over some time. Many traders have hyped price action to be an underrated component of the analysis. Truly price action can reveal a lot about the market and where it is going.
Forecast Future Market Trends
When you know the components of fundamental trading, predicting the future of the market won't be difficult. You should understand how to utilize market events to predict buy or sell signals. Also, you would be able to tell the general movement of a market trend with adequate knowledge of the price charts like candlestick patterns, lines, and more.
Market trends are usually characterized by zigzag patterns sloping upwards or downwards. Up means the market is bullish and traders can buy while a downtrend means the market is bearish and traders can sell — Yet the financial markets are more complex than this simple explanation. Sometimes the markets can make sudden changes and jeopardize a trader's hopes of making a profit.
The Contrary Technical Analysis
We all know words and the opposite, right? If fundamental analysis had an opposite, it would be technical analysis. Among traders, some strongly support one of these analyses and despise the other. While fundamental analysis deals with what you might call reality or market situations, technical analysis deals with figures, graphs, and clumsy charts.
Advantages Of Fundamental Analysis
Since fundamental analysis gives a general overview of the financial market and what businesses are alike, it is better for long term traders who like the more patient form of trading. Long term trading usually means traders rake in large returns on their investment in one trade if a trade decision goes in their favor.
Unlike fundamental analysis, the short term predictions of technical analysis can be problematic for long term traders. To make a good investment by using technical analysis you'll be making peanuts for profit.l And this is preferred for swing traders.
Disadvantages Of Fundamental Analysis
Fundamental analysis cuts out the noise in the financial markets, short term downtrends would be insignificant in fundamental analysis. These short term opportunities would be invaluable for an investor who favors catching small pips or doesn't mind quick returns of investment.
In summary, fundamental analysis is about using market situations to analyze financial markets. The different concepts of fundamental analysis also help to understand different ways that you can analyze markets. Yet there is another method of analysis called the technical analysis which involves the use of tools like ADX, Bollinger bands moving averages that are very familiar with forex traders.
The fundamental analysis isn't necessarily better than the technical. They both have their use cases. The fundamental analysis is suitable for long-term investments while the latter favors the short-term.
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