What Is Fundamental Analysis?

The Core Idea

While technical analysis focuses on what the market is doing, fundamental analysis asks why. It examines the underlying economic forces that drive asset prices — interest rates, GDP growth, corporate earnings, trade balances, political stability — and uses them to determine whether a market is overvalued, undervalued, or fairly priced.

For forex traders, this means studying the economic health of countries. For equity traders, it means analysing company financials. For commodity traders, it means understanding global supply and demand.

Macro vs Micro Fundamentals

Macroeconomic fundamentals affect entire markets: central bank policy, inflation, employment, GDP growth. These drive currencies, indices, and commodities. A surprise interest rate hike from the Bank of England strengthens the pound across all GBP pairs.

Microeconomic fundamentals affect individual companies: revenue, earnings, debt, competitive positioning. These drive individual share prices. A strong earnings report from Apple lifts AAPL while the broader market may be flat.

How Traders Use Fundamental Analysis

Some traders use fundamentals exclusively — forming a directional view based on economic data and central bank expectations, then holding positions for days, weeks, or months. Others use fundamentals to establish a directional bias and then use technical analysis to time their entries and exits.

The most common approach for CFD traders: know the fundamental picture (is the economy strengthening or weakening? Is the central bank hawkish or dovish?), then trade in that direction using technical setups for timing.

Limitations

Fundamental analysis tells you what should happen — not when. A currency can remain overvalued for months. A stock can stay cheap for years. Markets aren't always rational in the short term. This is why most active traders combine fundamentals with technical analysis: fundamentals for direction, technicals for timing.