Lesson 11 – Fundamental Analysis

Fundamental analysis is the methodical analysis of a collection of relevant market information within a specific time frame in order to determine the intrinsic value of the market which is used to compare against actual market prices so as to derive a conclusion on the market.

Fundamental analysis is a form of macroeconomics. Its biggest advantage is that it establishes cause and effect using scientific and rigorous analysis. However, in practical application, most investors think it lacks operability.

The main reasons are:

(a) Its practical application requires traders to have an extremely high level of professional knowledge. At the moment, even renowned economists do not dare to claim that they have completely grasped the theory of fundamental analysis, let alone common investors.

(b) It requires an extensive collection of real-time information and the establishment of a comprehensive database. Any information that may cause fluctuations in the market such as insider information and market sentiments must be collated and analyzed immediately to forecast the potential impact on the market. This is very difficult to achieve for common investors.

(c) The biggest setback of fundamental analysis is that it is not quantifiable. For example, after the Federal Reserve releases its GDP data, it is impossible to determine exactly how big an impact it will have on the forex market or how many pips it will move. There is no way to reflect all these in numbers. Fundamental analysis offers a comprehensive view of the market and a glimpse of the possible trends.

However, technical analysis is still needed for actual trading.