Fundamental Analysis Methods |
In the classical sense of the average trader, fundamental analysis is news trading. Good statistics that exceeded forecasts – the price is going up. Negative statistics or statistics that did not meet investors’ expectations – the price goes down. The source of news is the economic calendar, news feeds and publication of financial statements. In theory, everything is correct until the question arises: how to actually analyze information, forecasts and statistics? For this, there are several methods of fundamental analysis.
Methods for evaluating fundamental information
Fundamental analysis methods can be used in all markets, but some of them work better in the stock market, some in the foreign exchange or commodity.
- Comparison… Fundamentally similar events or criteria of different countries are subject to comparison. For example, GDP can be compared, quantitative easing methods, industry-specific statistics, etc. A few important points:
- Often, indicators are compared over time. That is, not GDP over the years, but the change in GDP over certain periods.
- Several indicators are compared simultaneously: discount rates, GDP – basic macroeconomic indicators, etc. And only then a conclusion is made.
- Seasonality… This method of fundamental analysis means the dependence of trading volumes at certain periods of time: before and during holidays, during the heating season (relevant for oil and gas), before holidays and weekends. The cyclical nature of changes in quotations is of an applied and psychological nature, therefore it can underlie a trading system.
- Correlation… When there is panic in the markets, money goes into gold – an example of inverse correlation. It does not always take place, but the dependence of quotes can be an auxiliary signal.
- Grouping and generalization… By the method of fundamental analysis, based on mathematical and statistical methods and the search for patterns. Fundamental indicators are divided into groups according to certain criteria, a basic criterion is selected, against which a comparative analysis is carried out.
- Deduction and induction… Systematization of many factors and building a logical chain of conclusions from the general to the particular and vice versa.
Output… Fundamental analysis is a tool that analyzes the macroeconomic or financial indicators of the market. Their combination can be a separate trading system or act as a signal confirmation tool. What methods of fundamental analysis do you use? Share in the comments!