Fundamental analysis · Fundamentals
What Is Fundamental Analysis?
Why prices really move, and how traders use it.
▶ Watch the free video lesson with TomWhat it is
Fundamental analysis studies the forces behind price: company profits, valuation, the economy and interest rates. Technical analysis tells you when; fundamentals help explain why and warn you about the events that can move a market overnight.
How it works
- Price is what you pay; value is what a business or currency is actually worth based on its earnings and outlook.
- Work top-down: the economy and interest rates first, then the strongest sectors, then the best companies inside them.
- Traders use fundamentals for three jobs: avoiding event risk, finding catalysts, and choosing a directional bias.
- Combine both: fundamentals choose WHAT to trade and in which direction, technicals choose WHEN to enter and exit.
The rules
| Entry | Technical setup in the direction of the fundamental bias. |
|---|---|
| Stop loss | Set by the chart, never by your opinion of the company. |
| Exit | Technical target, or before a major event you do not want to hold through. |
| Filter | Check earnings dates and the economic calendar first. |
Pros
- Explains big moves and gaps
- Keeps you away from avoidable event risk
- Gives a longer-term directional bias
Cons
- Slow to play out
- Markets can stay "irrational" longer than expected
- Lots of data to follow
Common mistakes
- Fighting the chart because "the company is great"
- Holding through earnings without a plan
- Ignoring the economic calendar
Lesson transcript
Welcome to the fundamentals series. I'm Tom. So far we've studied charts. Now we'll look at what actually moves those charts: profits, valuation, the economy, and interest rates. Technical analysis reads price itself. It's great for timing. Fundamental analysis studies the reasons behind price. It's great for direction, and for knowing which events could move a market overnight. Here's a real-life pattern. This index slides for weeks because traders fear the central bank will raise interest rates. That's pure fundamentals. Then the decision comes out. The bank holds rates and sounds softer than feared. The market rips higher and a new uptrend begins. The chart showed the move. The fundamentals explained it. Professionals work top down. First the economy and interest rates. Then which sectors benefit. Then the strongest companies inside those sectors. Only then do they open a chart and look for an entry. As a trader, you'll use fundamentals for three jobs. Avoid event risk, like earnings and big economic reports. Find catalysts that start new moves. And choose a direction, so you trade with the bigger story, not against it. Recap. Fundamentals choose what to trade and which way. Technicals choose when to get in and out. Use both together. In part two, we'll read an earnings report.
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