When it comes to trading, it might be company stocks or cryptocurriencies there isn't any full proof formula for making profits, what we have is number of indicators, methodologies and our mind !! And these methodologies can be differentiated into two types : Technical analysis & fundamental analysis. In this series of articles we'll go through Fundamental Analysis.
I think now we've covered all the basic things required for diving into dipper into crypto trading, if you haven't read previous articles then check them out if you're newbie in game of trading.
1) Order Types In Trading (Part -1)
2) Trading Terms That Every Trader Should Know (Part-1)
Let's dive in...!!
What Is Fundamental Analysis ?
Before going directly into it, let's first understand what Fundamental Analysis actually means.
In general, fundamental analysis is a methodology used by investors and traders to evaluate the financial assets such as company stocks & crypto in our case. It can be also used by institutional investment firms to invest in private or public companies. After completing the analysis by studying both internal as well as external factors affecting company/crypto, traders reach to the surety that the asset is either overvalued or undervalued, depending upon their conclusion they try to creat and impose trading strategy to get most out of the trade.
The fundamental analysis starts from small area of research to the vast area of research. Let's divide them into three parts and understand it by creating a scenario.
Scenario : You found an interesting company from the investment point of view. So following steps will be your fundamental analysis.
(For the sake of simplicity & understanding we'll stick to the traditional company example)
1) Internal Evaluation
At this very first stage of fundamental analysis, you should gather all the internal information of that company (I don't mean their secrets 🤪) what I mean from their internal data is, their annual return like how much they spend, their earnings, balance sheets, financial statements and keeping it in one term is gathering their cash flow.
Now if company is public then you can get all of the above mentioned data on internet, make sure you get it from trustworthy sources such as government sites or some other institutionals website. Now after gathering data and taking look at it, you should get an understanding that whether the company is growing or failing.
2) External Evaluation
If you're on this second stage of fundamental analysis then it means that the company is doing well. Now it's time to zoom out a bit and expanding your area of research.
In this external evaluation, you should look at the the sector of that companies operation, like whether if company is working in energy sector specially in renewable energy then the changes of growing that company are much higher as now governments are providing subsidiaries to environmental start-ups or businesses, once you categorised the sector then you look for their competitors, company's demographics, it's area of target, near future plans of company.
For high volume traders inflation is also one thing to look into as even a small change in inflation can cause loss of millions of dollars. But it's applicable for high volume traders but it's still good to check the inflation.
3) Overall Evaluation
After completing internal and external evaluation, there's one next step, its overall evaluation.
Once you get results from internal & external evaluation you can compare and analysing them together. After that you came up with a stock price of that company and compare with it's current market, then you decide whether it's overvalued or undervalued. If your calculated price is greater that current value it means the asset is undervalued & you can go for long position (buy) and it's vice versa then it'll be overvalued and you can go with short position (sell).
This is enough for this article, we'll cover other topics in next articles of this series.
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This is the overview of Fundamental Analysis. The index of this FA series of articles will be as following :
#1 Introduction to Fundamental Analysis
#2 Fundamental Analysis vs Technical Analysis
#3 Best Indicators for Fundamental Analysis
#4 Cryptocurriencies & Fundamental Analysis
#5 Pros & cons of using Fundamental Analysis
Note : Fundamental Analysis has it's strategic importance, so if you want to get involved into professional traders community, it's important to understand it (even if it sounds boring)
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