Fundamental Analysis: Stock Market vs. Forex Differences
February 25, 2021
Fundamental Analysis is a practice that all traders should engage in, if possible with some regularity. It's one of the few methods that allows acquiring an in-depth knowledge of the market, even from a predictive perspective. At the same time, it's not an easy practice to master, quite the contrary. According to some, it's even more challenging than the infamous technical analysis. However, what matters most is that there isn't "one" fundamental analysis, but... Many. Specifically, as many as there are asset classes. Each asset class, in fact, imposes its own rhythms, approaches, and investigation methods.
It's particularly useful to reflect on the fundamental analysis of two asset classes that are often compared, perhaps unduly: equities and Forex.
What are the commonalities between Forex fundamental analysis and equity fundamental analysis? Let's find out.
A Focus on Fundamental Analysis
Before discussing fundamental analysis extensively, it's important to frame the topic, that is, to define fundamental analysis and explain what is meant by this term. Well, fundamental analysis is the study of all events that occur outside the market and that, in one way or another, can affect asset prices. The goal is to understand the market in its complexity but also to estimate the near future of prices, an activity that is normally difficult and always involves a more or less wide margin of error.
Fundamental analysis is based on a summary: the chart reveals a lot, but not everything. The elements capable of impacting various assets must also be sought elsewhere, as the market does not function in watertight compartments: the various areas of economic life are intertwined. From this perspective, the distance from technical analysis, at least in its most dogmatic version, appears obvious.
Often, fundamental analysis and technical analysis are spoken of as two practices that are in antithesis, that exclude each other. It's true, they propose different visions, but this doesn't mean they are incompatible. On the contrary, they are actually complementary. The truth is that they should be practiced together, perhaps one as a countercheck to the other, or simply to have a more complete overview of the forces that, at that given moment, are moving prices.
The advice, therefore, is to shed the dogmas that stand between the trader and the profitable exploitation of both practices. In particular, it's important to set aside the belief that prices discount everything. This belief, in fact, tends to exclude technical analysis from the game, depriving the trader of a useful, if not essential, tool for dealing with market uncertainty.
As we mentioned at the beginning, practicing fundamental analysis is not at all simple. The reasons are essentially two. Firstly, it's a matter of interpretations. If technical analysis elevates calculation and statistics to essential elements, fundamental analysis lives - precisely - on interpretations, on more discursive associations and elaborations. Therefore, what counts most is the trader's experience and competence.
The second reason lies in the peculiarities of each asset. If the tools of technical analysis, at the end of the day, are always the same, the market movers of technical analysis often change from asset to asset. After all, each asset is moved by events, dynamics, and external data of its "own", which reveal its interdependence with the real world.
Forex vs Equities: Commonalities and Differences
Forex and equities are two markets that are often compared, but are actually very different. They are so precisely because of the price formation mechanisms. Currencies are susceptible to the economic environment, the actions of central banks (which regulate their supply), and trading. Equities are obviously susceptible to trading and the economic environment, but also to the performance of the issuing companies.
Below, we analyze the differences and commonalities of the "two analyses".
The Differences Between Equity Fundamental Analysis and Forex Fundamental Analysis
The differences, as mentioned, lie above all in the class of market movers that must be taken into consideration. Take central banks, for example, which are among the most important entities in the financial economic landscape. Well, their weight is far more evident if you trade currencies. Central bank decisions have a dramatic impact on Forex, as by modifying interest rates and quantitative easing programs they upset the money supply from time to time.
Central bank decisions also affect equities, no one can deny that. However, they do so in a decidedly more indirect way, like many other macroeconomic data. Central banks, basically, have no power over the stock market.
This imposes different rhythms and approaches between those who practice fundamental analysis for equities and those who practice it for Forex. The latter are required, for example, to analyze the speeches of central bank policymakers in an attempt to guess future moves.
Another substantial difference concerns microeconomic data. Those who trade equities must look at the "minute" performance, and specifically at the performance of the issuing company. The most impactful market mover for an equity, in fact, is precisely the set of data on the company's revenues, profits, and balance sheet. This type of analysis is always "fundamental", but has nothing to do with what is required, instead, of Forex traders.
The Commonalities Between the Two Analyses
There are obviously also commonalities. The most evident one is the importance of macroeconomic data, that is, the performance of the real economy as a whole. The study of GDP, labor market parameters, industrial production, etc. is important for both Forex traders and equity traders.
This is also because the economic environment impacts currencies, which express its strength, but also and above all the growth prospects of individual issuing companies. Of course, the analysis must be differentiated based on the asset, considering elements such as the reference national economy (in the case of currencies and shares of non-multinational companies) or the reference sector (in all cases, if we are talking about equities). However, it can be considered a unifying trait, a commonality between the Forex universe and the equity universe.
