What is Fundamental Analysis?
Fundamental Analysis is a method of analyzing and evaluating markets by looking into the economic statistics of a currency or financial statements and country/industry specific conditions when it comes to a stock or index, attempting to measure the intrinsic value. These fundamentals can include a wide range of areas, from a company's or markets's financial health, to industry news and the wider economic picture. Fundamental analysis is considered to the opposite market analysis approach of technical analysis, which involves looking at the price and volume only. For more information, read this article.
Should I use Fundamental or technical analysis?
There’s no straightforward answer to this – you could try one or the other or a combination of both. Are you someone who enjoys interpreting news and data that you may read about? Or are you someone who prefers the studying of price action movements on a chart and incorporating technical analysis into that?
There are two broad schools of thought when it comes to Fundamental Analysis. Neither approach is better than the other. If you’re new to trading, you might want to know all that you can about the company or industry or country that you are thinking of trading.
Some traders like to take a ‘Top Down approach’. This means that they set out by looking at the bigger picture, typically through macroeconomic data. They’ll sift through the latest news on interest-rates, GDP, inflation, exchange rates, productivity, energy prices etc. to identify global economic trends.
Once they’ve found a sector that looks promising, they’ll start to zoom in on individual companies or markets.
The flipside to the ‘Top Down approach’ is the ‘Bottom Up approach’. This involves looking closely at individual companies or markets first, before even thinking about the wider economic picture and context.
Traders who use this approach will often spend their time searching through company statements (or for FX markets, typically upcoming and previous economic data and policies of central banks) and financial records, looking at things like past and present earnings, assets and management reports. Only once they’ve identified a company or a market with adequate potential will they assess the wider industry picture and macroeconomic data.
Finally, whichever approach you prefer, don’t forget, Fundamental Analysis is often applied together with technical analysis to provide an overall and more complete view.