Tag Archives: fundamental

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Fundamentals Drive My Trading

I began trading with the idea of using pure technical analysis. The basic tenets of TA, that all things are known by the market or will be known, and all that knowledge is represented in the charts, was a big draw for me. TA broke trading down to simple price action, technical indicators, candle charts and I was enthralled.

However, over time, I have also come to love the fundamentals and view them as a primary driver of my trades. If the trend can be likened to the tide in the ocean, the fundamentals are the ocean itself.  The fundamentals lay the foundation for the house to be built on, they prime the canvass so that the master can create a painting and are the waters from which the market tide will flow.

My description may sound esoteric and philosophical but its true. Imagine a foundation being laid for a new building. As more and more details about that foundation become apparent you get a feel for what the building is going to be. Each brick of the building is important, and adds to the whole, but on an individual basis means very little in terms of what the building will look like. The foundation, the fundamental basis the building is built on, gives the building its character. Is it a house, an apartment building, an office? Once you get a feel for what the building is going to be you can start to make educated guesses, speculations, about what it will look like, how many rooms it will have and when it might be finished. The same is true for the financial markets. When you have a grip on what the fundamentals are you can make better speculations on where the markets are going.

What Is Fundamental Analysis

In terms of trading, fundamentals can refer to a couple of different things, depending on which market you are talking about.  Sometimes there is more than one fundamental driver of an asset, sometimes those drivers are in line with each other and other times not. For a stock fundamentals can include the state of the economy, the health of the business, revenue, product pipeline, consumer sentiment, inflation and other economic indicators. For a commodity supply and demand is the biggest fundamental driver although economic conditions have a lot of affect as well. These factors are used to determine if an asset is under, over or fairly priced.

Fundamental analysis also ties into the greater market cycle. The economy cycles between growth and recession and those cycles drive market values. GDP, Gross Domestic Product, is one factor that can be followed as an indicator of the greater market cycle. This is the sum of the output of a region, a country or the world.  Rising GDP, expanding or contracting GDP growth and expectations for growth/decline can affect prices from the near to the long term.

Another thing to consider is how fundamentals affect individual assets. A bullish economy may be good for stocks but it is not good gold and can be both good and bad for oil. Rising GDP and rising GDP expectations are closely associated with a rising stock market. Rising GDP is also associated with rising currency value. When a country is doing well its money becomes stronger.

Within the GDP data, which is usually released on a quarterly basis with monthly revisions, are other fundamental economic drivers of the market. These shorter term data points are drivers of shorter term trends within the greater market cycle. Employment and jobs are perhaps my favorite but there are numerous gauges of inflation, manufacturing, housing  and the consumer that must also be included. Each of these gives a different view of the underlying economic conditions and has the power to move the market

How I Trade The Fundamentals

I like to keep abreast of the economics and the current data so I have a grip on what’s going on, a view of the foundations so to speak. I let the data come and the market do it’s thing. I don’t use any one data point as a trigger other than what the market tells me to do. I have a an understanding of the fundamental conditions but I still let the technicals dictate my trades. A rising tide of fundamentals will show itself in the charts in the form of an uptrend or bull market. As the fundamental picture unfolds there will be catalysts for rallies and corrections and all will be present in the chart as a signal in one form or another. When the technicals and the fundamentals agree, and the signals are in line I make a trade.

My approach to fundamental trading is exactly the same as technical. When the fundamental trends are up, I trade up, when the fundamental trends are down I trade down.  The technicals provide my signals, when they agree with my fundamental look I know I can make a good trade with confidence.