Learn the basic of fundamental analysis, how to be one step ahead against other traders and how to piece up all the seemingly jumbled up economic information for your advantage.

fundamental analysis

Fundamental analysis is just like a weather forecast with a half-drunken weatherman. A day before, he said the weather is going to be sunny all day, so you plan ahead to picnic. But, when you step out of your house, the heavy clouds greets you, instead. To your dismay, the weatherman revised his forecast later.

Yes, fundamental analysis is subjective, and without proper knowledge, it will mislead you. In order to benefit from fundamental analysis, you need to figure out the big picture first.

 

What on Earth is the Big Picture Thingy?

A specific economic report (like NFP or GDP) is only a single piece of a jigsaw puzzle. When they are pieced together, only by then you can get an insight into "the big picture".

Conversely, if you only narrow down on a single piece while ignoring the other pieces, you are prone to be misled. That's why you can't only rely on a single so-called high-impact data release all the time without considering other economic data releases.

Here's an actual example of it:

fundamental

Let's say someone told you to stick only to US NFP (Non-Farm Payrolls) because it contribute about 80% of Gross Domestic Product. That statement alone makes US NFP to hold high impact during its release. Therefore, most of the time, whenever it is released higher than expected value, a rise in US dollar exchange rate is imminent.

However, in real fundamental analysis, you cannot expect the same result for 100% certainty. One such case was what happened on 15th January 2017. During that date, US NFP was released way below the expected score.

Your logic would state that greenback (US dollar) should suffer from it, but that's not the case anymore. Instead, it rose to new highs for days ahead.

So, how did that happen?

What caused it?

The answer was the other piece, namely Average Hourly Earnings. It may be overlooked for most of the time it was released with NFP, but at that particular time, it packed a bigger punch. The huge rise from -0.1% to 0.4% for the hourly earnings data attracted more investors to keep buying the US dollar even though NFP plummeted.

nonfarm payrolls calendar

So, then again, how do you piece all the information and piece it together as one big, insightful picture?

 

Tips to Get the Big Picture in Fundamental Analysis

Here's one tip for you: perseverance is the key to success. You'll need perseverance to actually benefit from fundamental analysis. That is especially true because on some occasions the market will surprise you. Heck, even professionals cannot guarantee a 100% success rate even though they take their daily dose of fundamentals regularly.

Let's start with the frameworks.

Fundamental analysis is basically an intrinsic value assessment of any given asset. In your daily language, it's the process of giving a mental value to a certain thing; like how much this basket of eggs should cost you, etc.

But it also goes more than that. What makes fundamental analysis great is the fact that avid traders use it to gauge the potential value of assets. If ordinary peasants value things based on their current state, fundamentalist does it even better; they predict what that same thing will value in the future.

Here's an example:

  • Mark is a seasoned trader and he also manages a local granary that stores farmer's crops.
  • Jason is a local wheat farmer.

One day, Jason and his co-farmers managed to over-produce wheat stacks, therefore the supply was overabundant, so the price dropped from the all-season average. Then came Mark, Jason usual customer.

Jason had expected Mark to purchase at the same exact budget but with more loads as the price per metric ton drops. But to Jason surprise, Mark offered ten fold of his usual budget.

"Hey fellas, what makes you so bulked-up lately, no pun intended, though," said Jason to Mark.

But Mark only replied with a smirk and opened up his wallet, sealing the deal.

Mark knew something that Jason didn't; the locust swarms attack loomed over.

Due to locust attacks, Jason and all other farmers cannot produce wheat stacks anymore for months later. That caused the wheat price to skyrocket as there was more demand than supply. It's only natural to traders like Marks to resell his stock when the price jumps much higher than its original price.

Eventually, the bulks of wheat Marks purchased from Jason earned him huge profit.

The example above is the core activity of fundamental analysis. It lies in how Marks got better informed than Jason. In a real forex trading environment that's how each trader uses macroeconomic tidbits to get ahead of other traders.