Fundamental traders, or fundamentalists, are those who use “fundamentals” to trade on. In other words, they trade on the news whether local or international. Therefore, they pay close attention to the news when deciding whether or not to make an investment by studying in detail economic indicators in the market. On the other hand, those who study chart patterns go for a more Technical Analysis Approach and are known as Technical Traders. Some traders believe a combination of both approaches helps determine whether an investment in a stock is worth their time.
However, in this article, we focus on strategies used by fundamental traders. In the Fundamental approach, Forex and Contract for Difference (CFD) market prices are affected by economic data, political events, and the underlying connections between them. Read on to find out what expert strategies fundamentalists can use to improve their trading portfolios.
The first strategy used by expert fundamentalists is an investment strategy called top-down analysis. In this strategy, analysts tend to focus on the bigger picture and work their way down through the market. After looking at stocks with a general outlook and deciding that a certain stock subset has potential, the analyst will then delve deeper into the details of the subset to decide whether to make an investment. This approach focuses mainly on
narrowing down the global economic market, then later assessing macroeconomic trends that have potential before selecting single stocks within these market areas to invest in.
Bottom-Down Analysis takes the polar opposite approach of investing compared to Top-Down Analysis. Bottom-Down Analysis focuses on analyzing individual stocks from the bottom level up rather than looking at the global economy as a whole. In this investment approach, the fundamentalist looks at a certain company’s stocks on the most specific level and then works upwards to aggregate macroeconomic information before deciding whether to invest in a certain stock or stock subset.
Analysis Of Forces Driving Supply And Demand
An important strategy used by experts is one that seems rather basic, but fundamental traders should always keep their eye on the market as the market has a direct effect on commodity valuations. Investment specialists at TheStockDork.com say that the stock market moves incredibly fast and that fundamental traders need to always stay tuned to the market to be successful. They should also focus on central bank actions, economic releases, geopolitical tensions (as political conflicts and wars have direct impacts on tradable goods), and seasonality (such as the end of the calendar year as this also has an effect on supply and demand which subsequently affects stocks).
Balancing Of Trade And Interest Rates
World trade and interest rates also have a direct effect on stocks and are key drivers for country currencies. This is why another expert strategy used focuses on balancing trade and interest rates together in order to decide whether an investment will be successful. For example, if a country has a trade surplus that means that there is a lot of demand for its products and services which will positively influence that country’s GDP (which is a measurement of the cumulative value of all goods and services produced within a certain time period) and therefore its currency, making stocks in that country worth investing in. Trade deficits also indicate the opposite, signaling red flags when it comes to purchasing stocks from a certain market. On a similar note, higher interest rates result in high cash inflows which consequently drive up currency values.
Studying The Economic Calendar
A final strategy that is important to fundamentalists is diligently studying the economic calendar because fundamental traders tend to plan for long term investments rather than short term ones. They tend to look at the economic calendar for the upcoming period before deciding whether an investment is worth their time and cash. The economic calendar shows a rough schedule for economic events that are set to take place during a certain time period. It typically has five categories that fundamental traders look into when considering a trade: the expected time for the event to occur, the event name, the currency impacted by the event, the actual figure that is anticipated, the forecasted figure, and the previous figure. Traders should analyze these categories based on market-moving economic events such as GDP, Consumer Price Index, Producer Price Index, private sector spending and employment, inflation, and interest rates when making an investment decision.
While technical stock analysis involves studying charts and overbought/oversold levels to identify trends and patterns in the stock market, those who practice fundamental trading techniques believe that trading moves based on a number of factors like breaking news, macro and micro-economic data, and even natural phenomena that may occur. The expert strategies listed above can help fundamental traders make their portfolio better and hopefully reach some major trade wins.