INTRODUCTION TO FUNDAMENTAL ANALYSIS

Fundamental Analysis in general is the underlying force that can impact the well-being of a company, an industry or the economy. As with all types of analysis the aim is to use the information to give you better odds in predicting future price movements. Done well this will in turn give you more reasons to trade and make profit from your ability to correctly assess them. The analysis of fundamentals will involve the examination of financial and economic data to ascertain the health and growth potential of markets, companies, industries, and economies.

Fundamental Analysts will want to know what has caused a market to move, unlike a technical analyst who is only concerned with the effect of the move. At a core level, fundamental analysis is dealing specifically with financial data and economic reports, and this is relayed to the market via economic indicators. There are no sure-fire methods in the examination of fundamentals, but it is fair to say that most of the time they are priced into the market and it is only the unknown that will influence price movements. Therefore, in the absence of a continuation of news to support a given move the market will start to react in the opposite direction.

So, consider the following two points when using fundamentals:

• Does the market know the news before the news is released?
• News allows you opportunities to evaluate underlying market conditions

Understanding fundamentals in a top down approach would be to first have an overall evaluation of the general economy. Imagine if the economy is like the tide, and the various industry groups and companies are like boats. When the economy expands most sectors and companies will grow, when economies decline in performance sectors and companies usually suffer. The exception to this is the bond market which has an inverse correlation to the economy due to the ‘flight to quality’ during difficult economic times.

Fundamentalists then use economic data such as interest rates and figure releases to form some of their trading decisions and/or advice. This data helps them get a wider overall feel for the health of economies, the sectors and industries within that specific economy. The approach to fundamental analysis is often a difficult area because it has so many different implications, as Michael Lewis noted in his book ‘Liar’s Poker’ the bond market “lurches” with economic data. Due to this fact it can be a treacherous path to identify which data is most important? What does it mean? How should the market react? To separate the wheat from the chaff we will be going through economic releases in greater depth later in the course and highlighting the more important releases that will prime your understanding of the figure trading technique.