Fundamental analysis strategy is one of most time-consuming strategies, but it give in depth knowledge of underlying asset that is being traded. Main characteristic of this strategy is examination of the underlying forces that drive price of asset up or down. This strategy is commonly used by investors who invest in stocks.
One can analyze single company, industry, sector or entire economy or set of economies (forex traders). As with any analysis goal is to try to predict future movements of prices. Analyzing single company can provide an answer to question is that companies stock undervalued or maybe overrated. Once trader decides that company is undervalued he will buy a call binary option, if it is overrated he will buy a put binary option.
Process of using fundamental analysis strategy
If you wish to trade stocks you first need to see how is economy doing in general. If it is expected economy will grow in the future period it is highly likely similar will happen on the stock market. Once you determine future economy trend you can proceed to next step. When trading binary options it is irrelevant is economy growing or shrinking, you can always buy calls and puts depending on the situation.
Next step is to determine certain group of companies you wish to invest in. Best practice is to pick companies from the same industry. That way it is easier to compare companies. Learn about that industry as much as possible and analyze patterns. Sometimes it is more important to recognize right industry to invest in than a simple company. If entire industry grows you can win money even if you don’t trade only stock of market leader.
After determining industry it is best to recognize the best companies of the industry. It is advisable to follow those companies and keep track of their results. It helps a lot to realize what offer edge in observed industry. It can be marketing, technology, market share or innovation. The most important variable in any industry is management. Companies with good management teams achieve better results as a rule. Even if company is going through hard times, good management will find a way out.
When analyzing single company it is important to know companies business plan, take a look at financial reports, asses management and put it all together. After this process you can finally predict company stock’s future price movements. And knowing that is gold.
As a conclusion it is important to notice that fundamental analysis strategy is great for recognizing long term trends, not short ones. It will help you greatly to understand business in general much better. This strategy is time consuming and that fact is its greatest downside. The best way to practice is to open a free demo account from one of the brokers.
For further reading on fundamental analysis visit source like investopedia.