Fundamental Analysis
The study of economic factors that determine an asset’s fair value.
Core principle: Price follows fundamentals. Eventually.
What Is Fundamental Analysis?
Fundamental analysis answers: What should this asset be worth?
Then compares:
- Current price → Undervalued?
- Current price → Overvalued?
Fundamentals by Market
Forex
| Factor | Impact | Frequency |
|---|---|---|
| Interest rates | High impact | Regular |
| GDP | High impact | Quarterly |
| Inflation | High impact | Monthly |
| Employment | Medium | Monthly |
| Central bank policy | Critical | As needed |
Stocks
| Factor | Impact | Frequency |
|---|---|---|
| Earnings | Critical | Quarterly |
| Revenue | Critical | Quarterly |
| Guidance | High impact | Quarterly |
| Economic data | Medium | Monthly |
| Fed policy | High impact | As needed |
Crypto
| Factor | Impact | Frequency |
|---|---|---|
| Adoption | Critical | Ongoing |
| Regulation | High impact | As needed |
| Network growth | High impact | Ongoing |
| Competition | Medium | Ongoing |
| Macro sentiment | High impact | Ongoing |
Commodities
| Factor | Impact | Frequency |
|---|---|---|
| Supply/demand | Critical | Regular |
| Weather | High impact | Seasonal |
| US dollar | High impact | Constant |
| Geopolitics | High impact | As needed |
Key Forex Fundamentals
Interest Rate Differential
Definition: The difference between interest rates of two currencies.
Why it matters:
- Higher rate = stronger currency
- Carry trade flows
Trade: Buy higher-yielding currency, sell lower-yielding.
Economic Calendar
| Event | Impact | Typical Move |
|---|---|---|
| NFP | High | 50-100 pips |
| CPI | High | 50-100 pips |
| FOMC | Critical | 100+ pips |
| GDP | Medium | 30-50 pips |
Key Stock Fundamentals
Earnings
Beat: Price jumps. Miss: Price drops. Guidance: Price follows.
Valuation
| Metric | Formula | Fair Value |
|---|---|---|
| P/E | Price / Earnings | < 20 (value) |
| P/S | Price / Sales | < 3 (value) |
| P/B | Price / Book | < 1.5 (value) |
Fundamental Analysis Process
Step 1: Identify Catalyst
What’s moving price?
- Upcoming event
- Recent data
- Market focus
Step 2: Analyze Data
What does it show?
- Beat vs miss
- Trend direction
- Comparison to expectation
Step 3: Determine Bias
Bullish or bearish?
- Positive data → Bias up
- Negative data → Bias down
Step 4: Find Entry
Wait for:
- Technical entry
- Confirmation
- Risk setup
When Fundamental Analysis Differs
1. No Immediate Effect
Fundamentals favor one direction, but price goes other way.
Solution: Trade technical confirmation.
2. Price Already Discounted
Positive news comes out, but price sells off.
Solution: Check positioning. Maybe it’s “sell the news.”
3. Conflicting Data
Mixed fundamentals.
Solution: Trade with technical trend.
Fundamental vs Technical
| Aspect | Fundamental | Technical |
|---|---|---|
| Timeframe | Longer | Any |
| Entry point | Approximate | Precise |
| Confidence | Direction | Timing |
| Data source | Reports | Charts |
Common Mistakes
1. Trading News Blindly
Mistake: “Buy on good news.”
Result: “Sell the news.”
Fix: Wait for technical confirmation.
2. No Event Awareness
Mistake: Trading blindly during high-impact events.
Result: Gaps and spikes.
Fix: Know calendar, reduce size.
3. Ignoring Positioning
Mistake: Everyone is already positioned.
Result: No one left to buy.
Fix: Check positioning metrics.
Key Takeaways
- Fundamentals — Drive long-term direction
- Events — Create opportunities
- Confirm — With technicals for entry
- Calendar — Know upcoming events
- Positioning — Too much = reversal risk
Related
forex.md >>>
Fundamentals define value. Technicals define entry.