Fundamental analysis... It's fundamental. It's one of the few activities that, in trading all markets and at all levels, allow the trader to see clearly and draw guidance to invest money wisely and profitably. However, it's rarely an activity that's always the same. In fact, it changes forms and sometimes even dynamics based on the market in which one invests. Perhaps the biggest differences are seen between fundamental analysis for Forex and fundamental analysis for
stock trading.
We discuss this in this article, taking stock of fundamental analysis in general and its variations in these two types of trading.
Why fundamental analysis
Fundamental analysis is the study of phenomena that occur outside the market but which, in various ways, can affect it. Fundamental analysis involves numerous fields, primarily economic but also political and, in some extreme cases, the social sphere.
Events, or phenomena, that impact the market from the outside are called market movers. It's possible to divide market movers into two broad categories: periodic and extemporaneous.
Periodic market movers are events, appointments, phenomena that are constantly and cyclically repeated.
Extemporaneous market movers, on the other hand, lack this cyclicality, but that doesn't mean they are less important. In fact, their effect on the market is often dramatic, precisely because they are unpredictable and detached from any logic of "early discount" by investors.
Periodic market movers, in general, are those linked to the economy, such as the publication of a value such as production, inflation, GDP change, etc. The category of "extemporaneous market movers", on the other hand, includes statements by policymakers, geopolitical and political upheavals, etc.
Generally speaking,
periodic market movers are simpler to study than extemporaneous market movers. Firstly, because they offer the conditions for investors to discount the news in advance. Secondly, because they are equipped with "historical data", tools through which any present data can be judged in its context and thus analyzed thoroughly.
In general, fundamental analysis involves studying market movers, estimating their outcome and then making a statistically-based prediction of
their effects on prices. However, when extemporaneous market movers emerge, fundamental analysis turns into managing contingency and the effects (often emotional) on the market.
As much as numbers, calculations and formulas can be daunting, technical analysis is much simpler than fundamental analysis. Also because the latter requires skills that expand into cross-disciplinary knowledge of extra-market environments and a certain capacity for interpretation.
Fundamental analysis in Forex
How is fundamental analysis carried out in Forex? What dynamics does it follow? What are the market movers that need to be studied? How to draw information from them to do good trading? Those who have been operating for some time and have already passed the beginner stage know very well how to answer these questions.
Forex lives mainly on periodic market movers. Even when extemporaneous market movers emerge, these are still linked to fixed appointments, and have an anticipatory function. Forex market movers, to a large extent, concern
monetary policy. There's nothing to be surprised about: after all, monetary policy actions act on the monetary base, which in turn impacts almost directly on currency quotations. The reference is obviously to the
decision on interest rates and Quantitative Easing.
Also important are the statements of policymakers who, in various venues, open the door to speculation about, precisely, the future of monetary policy.
But
the real economy is also important for Forex. After all, the strength of a currency depends
also on the economic strength of its country. Thus, the publication of data on GDP, employment, industrial production and inflation also plays a significant role in fundamental analysis for Forex. In fact, the latter should be kept an eye on as it is taken into consideration by central banks in a fairly predictable way during the rate-setting phase.
The simplest and at the same time most effective approach, for those doing fundamental analysis for Forex, consists of studying the extemporaneous market movers, basically the statements, papers and analyses of policymakers, to identify the outcome of periodic market movers, all followed by an estimate of the effects of the latter on prices.
An approach, this, that obviously requires method and constancy, as well as the acquisition of a wealth of knowledge to optimize the analysis process on the one hand, and to
avoid false signals (if they can be called that) on the other.
Fundamental analysis in stock trading
The discussion is radically different for fundamental analysis of the stock market. However, there are some points of contact. For example, the importance of market movers of the real economy. In fact, in this case the importance is even greater, since economic performance significantly impacts the ability of a company, small or large, to generate revenue. Let's think of a recessionary economic environment, where household consumption is in an upward trend: it is obvious that most listed companies would risk a reduction in turnover.
Market movers regarding monetary policy have their importance, albeit slightly less than they do in Forex. However, their importance is rooted in the
credit-side implications. A reduction in interest rates, for example, makes access to credit easier, and this can only benefit companies in general, including those listed on the stock exchange.
Fundamental analysis for stock trading, however, has two peculiarities. The first concerns the study.... Of the fundamentals of the issuing companies. A necessity, this, that obviously does not concern Forex traders. The most important market movers of "stock" fundamental analysis, if they can be called that, are those that concern
the economic soundness and market performance of the
individual company. Therefore, traders are required to study quarterly reports, income statements and balance sheets. Fortunately, all companies listed on the stock exchange are literally forced to publish this information, so finding it is not at all complicated.
Another peculiarity lies in the study of indices, an element that is completely lacking in the Forex counterpart. Each stock
is in fact linked to an index, either directly (because it may be included in the basket) or indirectly. Now, this index summarizes the performance of
all the stocks contained therein, but it serves as a benchmark for all the others. Therefore, the study of indices finds justification in their ability to provide an overall picture, to offer a contextual note, thus launching signals such that the investment in that specific stock can follow the path of rationality.
Obviously, stock trading also
has its extemporaneous markets. Again, these are largely statements by policymakers and events of a political and geopolitical nature. The former, in fact, often announce legislative changes that can facilitate or hinder certain business sectors. The latter can cause an objective impediment to the conduct of business. Let us think, for example, of the damage - in stock market terms and not only - caused by the unrest in the Middle East, which causes direct effects on the quotations of companies operating in those areas or which are simply part of an energy and oil context.
Stock vs Forex: conclusions
As we have seen, fundamental analysis for Forex and fundamental analysis for stock trading follow different dynamics, although there are points of contact. However, these are reduced to the study of market movers on the real economy and monetary policy, although aimed at finding contrasting elements.
That said, a question arises spontaneously... Which of the two variants of fundamental analysis is more complicated? Well, in light of what has been presented so far but also the experience of traders, it can be stated that
the most complicated is precisely the fundamental analysis for stock trading. There are at least three valid reasons to say this.
First, there are simply "more things" to study. Even if only for the simple analysis of the income statement and balance sheet, which in itself takes up a lot of time. The truth is that the stock market, still being the "king" of all markets, is characterized by an extreme relationship of interdependence with everything that gravitates around it and outside of it.
Secondly, the stock market is a very volatile and, if we want, also a very emotional market. Therefore,
the evidence gathered through fundamental analysis should be examined with greater care, and this makes the very activity of analysis even more complex and laborious.
Finally, while Forex has a limited number of assets, the stock market is simply more boundless. Sure, a trader can focus on a narrow basket of securities, but they'll still have to take into account "what exists". After all, more assets means more interaction. And, of course, more interactions means more complex and in-depth study.
