- The pros and cons of fundamental analysis
- Analysis is a hotly contested subject in the world of trading. Some traders praise the value of technical over fundamental analysis, others believe that “the fundamentals” are the key to “beating the market”.
- When trading, the more information, knowledge, and data you have, the better. But is spending all your time and energy on fundamental analysis worth it? That’s what we’ll be answering in this tutorial.
- Not caught up on fundamental analysis? Check out our earlier tutorial What is fundamental analysis for more information.
- The pros
- Fundamental analysis is a great way to determine general trends and potential big price movements. It uses both microeconomic and macroeconomic data, and the information needed is, for the most part, widely available and easy to access. For example, you’ll often find that news about major currencies is usually covered by mainstream media outlets. And, to make it even simpler to find the information you need, our app and webtrader include an integrated research portal and economic calendar that you can use to inform your trading.
- Compared to technical analysis, fundamental analysis takes more of a ‘big picture’ approach. This is useful because a lot of economies are connected, and so are their currencies. Also, certain geopolitical events may affect two or more economies, and their respective currencies – like sanctions or trade agreements, for example. Technical analysis usually looks at a specific instrument, within a specific timeframe, while fundamental analysis can give you information about multiple instruments if they are connected.
- Fundamental analysis is also based on the concept that instruments are either overvalued or undervalued, which leads to one of the most important market dynamics; supply and demand.
- The cons
- So, fundamental analysis can be a powerful tool, but its benefits can also be its drawbacks. Although it takes the ‘big picture’ into account, it lacks the precision of technical analysis. This is fine if your trading strategy requires a wider scope, but it can be problematic when you need a more micro view. Traders that use smaller, faster price movements, like scalpers, may not see them when using only fundamental analysis.
- Another strategy where fundamental analysis may not be that helpful is when trading breakouts. You need to plot trend lines or channels on a price chart to be able to see where support and resistance is, to determine the range of where a potential breakout may happen.
- Finally, one of the most frequently cited cons of fundamental analysis is the amount of time and energy needed to research, compile, and potentially confirm the necessary data, compared to technical analysis.
- Due to fundamental analysis’s broader scope, it may leave gaps in your picture of the markets. That’s why most traders use a combination of both technical and fundamental analysis to get a better idea of how the markets may move in the future. Once you have a strategy in place and start trading, you’ll be able to find the combination of analysis and indicators that works best for you.