Fundamental market analysis. Technical and fundamental analysis

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Fundamental analysis is a set of methods that allow predicting events in the market or in its segments under the influence of external factors and events. Accurate forecasting of market changes allows the player to make the right decisions in order to get the maximum benefit from such fluctuations. Fluctuations caused by events that affect politics and economics at the macro level are studied by fundamental analysis.

A successful player in the currency and stock markets, as a rule, conducts a deep technical and fundamental analysis of macroeconomic indicators that affect their development. The deeper the study of the fundamental components of the market, the lower the risks of participants. The main applied task of the analysis is to determine the most attractive areas for investment.

News

News affecting the market can be conditionally divided into:

• economic;
• political;
• rumors and expectations;
• force majeure.

In turn, economic and political news can be divided into expected and unexpected events. Expected news includes announced news thatentered in the economic calendar.

Validity period

The impact of news and events on the market may have a different time period, but the market reacts to any news almost instantly, revising the price ratios, and in the future, the events that have occurred can only support the existing trends. Therefore, market speculation on the news is possible only in a short time period, until the market again finds a stable position.

Economic calendar

Given the fact that most economic news has predetermined release dates, traders in the markets combine them into a special calendar. It brings an element of order into the inherently chaotic market, allows you to prepare for the event and give it a preliminary assessment. Dates are entered in the economic calendar:

• publication of statistical reporting by states;
• financial statements of the largest players in the market;
• come into force of adopted laws that change the conditions for doing business;
• speeches by leaders of states, heads of national banks and large financial institutions;
• other announced events that may affect the market situation.

Initial conditions for analysis

A simple fundamental analysis of the market can, as a first approximation in a short time frame, assume that in the absence of news, the market is stable and its general trends persist. Therefore, the main factors influencingon the occurrence of fluctuations and, accordingly, receiving speculative profits from these fluctuations, are news (events). Moreover, the more unexpected the news and event, the more market fluctuations they can cause. Every businessman, conducting fundamental market analysis, wants to avoid risks and losses and is interested in additional profit from fluctuations.

Economic factors

In order to conduct a fundamental analysis, we study factors that indicate the general state of the economy, such as:

• GDP trends - with GDP growth, the national currency and assets on the territory of the state are strengthening;
• the country's budget, the planned and actual size of its surplus or deficit;
• payment and trade balances, the ratio of exports to imports;
• consumer and wholesale price indices, inflation rate;
• unemployment data;
• Indices of industrial production and stocks, other indicators of the state of the economy.

There are dozens of different indices and macroeconomic indicators. For players in the market, all the signals given by the change in these indices carry important information, having studied which, you can correctly determine the strategy of your behavior in order to avoid losses and make a profit.

Economic news, as a rule, is expected - analysts try to predict the values of indices and indicators even before they appear. Only in the case of a strong deviation of actual values from forecasts, the market experiencessignificant changes.

Political factors

The change of government, election results, statements by state leaders, the adoption of laws and other political news are considered by fundamental analysis from the point of view of the impact on the economy and predict market changes caused by these events. The conclusion of interstate agreements, non-market regulation of the economy can have a significant impact on the overall economic climate in the state and in the countries that are its main strategic partners.

Political news includes strikes, armed conflicts, changes in the political structure, and other events. Their impact on the economy can have various consequences. Although, as a rule, major political shocks alarm investors and lead to negative results for the economy as a whole. A political crisis is usually accompanied by an economic downturn and vice versa.

Rumors affecting expectations

The spread of rumors can have a significant impact on market players. It is the expectations of people seeking to maximize profits that can increase investment in a particular sector of the economy or in a particular company. At the same time, such expectations lead to a change in the structure of the market. The risks of participants playing on rumors are very high, but if the bets were correct, then the profit on such investments is great.

Force Majeure

Major natural disasters that caused the destruction of industrial enterprises, roadscommunications and other infrastructure facilities, bring changes in the economic situation in the disaster region. Man-made disasters can change the investment climate of an individual company and the industry as a whole. Fundamental analysis allows you to determine the trends in the economy under the influence of such unexpected factors. It is used not only to study the market as a whole, but also for specific investment areas. You can analyze the situation at the enterprise, in the industry, a certain segment of the market. The most developed application areas are those that will be discussed below.

Fundamental analysis of the foreign exchange market

News and events in the economy often have a significant impact on national currencies. By studying the impact of events, the fundamental analysis of the foreign exchange market aims to predict the strengthening or weakening of national currencies in trading pairs. If the same news has a positive effect on the first currency of the pair and a negative one on the second, then the strengthening of the first currency against the second is obvious. An important factor in the foreign exchange market are the discount rates of national banks, especially economically strong states.

Fundamental analysis of financial markets and currency movements reflects the many processes taking place in the global economy and allows you to predict price movements to achieve maximum profits in an ever-changing world of trading. At the same time, it is important to take into account the cyclical development of the economy.

During periods of recession, when production is curtailed,interest rates fall, consumer demand decreases, unemployment rises, the national currency loses its appeal. Investors in the foreign exchange market will try to keep their savings in a more stable currency. But it must be remembered that periods of recession are replaced by stagnation and growth, it is then that the players in the foreign exchange market get their profits.

Fundamental analysis of the currency market in the short-term situation and the forecast of its development uses elements of technical analysis. The flat (stagnant) state is not interesting for currency exchange players. Fundamental-technical analysis is based on the use of mathematical modeling tools. For it, methods of mathematical data processing and their approximation are involved.

Fundamental stock market analysis

Trading in stocks, as well as other securities, requires in-depth study. Fundamental analysis of the securities market is based on the same signals as the entire economy. However, in this case, industry specifics play a significant role, because for many industries the same signals can have a multidirectional effect.

Fundamental analysis of the stock market requires a deep understanding of ongoing phenomena, both at the macro and micro levels. So, for example, the difficulties encountered in the sale of specific goods can lead to an increase in the sale of goods that replace them, to shift the focus of investors on the stock market.

Fundamental analysis of the shares of enterprises is based on a deep study of the statethe current economic situation, prospects for the development of the industry. It should take into account the financial condition of the enterprise, its balance of payments, human resources.

Fundamental analysis of securities requires the highest qualifications from a trader, an intuitive sense for market changes. Having studied these factors, investors make decisions on the acquisition or sale of the company's shares in the stock markets. Only a fundamental analysis of the stock market allows an investor to count on making the right decisions to make a profit.

Intermarket analysis

An important condition for the correct analytical conclusions is the understanding of the close relationship between different markets and their segments. Trends that have arisen in any market or in its segment inevitably lead to a general fluctuation. The magnitude of such fluctuations is related to the importance and integration of this part of the market into the overall processes of the economy.

At the same time, private and general trends may not coincide - growth in one sector of the economy may lead to a decline in other sectors and adversely affect the economy as a whole. For example, the fall in energy prices is far from having an unambiguous effect on individual sectors of the economy and on the economies of states.

In such a situation, despite the decline in energy-producing industries and industries related to their provision, there may be an increase in consumers of this resource. And only if the share of energy production in the state economy is large, this can lead to significant difficulties in the overall situation in the country's markets, causing a decrease in consumer demand andsolvency at all levels. Thus, the same events in different market sectors can lead to far from unambiguous consequences.

Difficulty of analysis

Fundamental analysis is based on events that affect economic processes, but when analyzing the market, one must be fully aware of the fact that market prices are created by all participants, and their formation is subject to many subjective factors, which can be quite unexpected from the point of view of analysis standards. After all, each player in the market individually evaluates the news received, and only the totality of decisions of all players finally forms the balance of supply and demand and, accordingly, the price.

All market participants, even before the event, on the basis of rumors, their experience, expert opinions, are preparing for a change and, in accordance with their expectations, change quotes in advance. Individual players react differently to the same news, sometimes making opposite decisions - this leads to the fact that even very significant news sometimes does not cause significant changes in quotes and prices. Such an analysis is very time-consuming, as it must take into account the reaction of all market players to the news. It can be considered that fundamental analysis is a discipline that studies the collective consciousness of market players.

Correct evaluation of signals

Stock indices and indices of indicators of the state of the economy are of an integrated nature and reflect onlygeneral trends in the economy and the market. For a detailed analysis and decision-making, it is necessary to study all the circumstances that may affect the results. It is not for nothing that people who profit from transactions on the stock exchange are called players, because in the end, luck, talent and the ability to correctly evaluate those market signals that fundamental analysis studies play a significant role in their work (and maybe even in the art of stock trading).