As a trader of any asset class, you want to know what drives prices higher, or lower.
While markets are not always predictable, with sound analysis, you can often get at least a reasonably good idea of the most probable scenarios.
A good trader knows when to trade. They recognize market trends and identify areas where they can reliably predict what is going to happen next.
But how do they do it?
There are two answers here: Technical analysis and fundamental analysis
In this article we are going to talk about fundamental analysis
Fundamental analysis is not at all limited to any asset –
The concept is simple: if you can recognize that an asset has intrinsic value that is out of proportion to its current market price, you can trade based on your analysis and, in theory, make a profit.
You should try to identify assets you believe have a strong chance of volatility due to macro- economic events such as crude inventories, rise or lowering of interest rates, global conflicts in specific regions of the world and so on.
That’s fundamental analysis. You are researching your investments to determine their future value.
It works the other way too. If you research an asset that has a big market cap, you may determine that the asset is highly overvalued. That’s fine, and happens often.
You can in fact trade to make a profit when assets drop in price. This is called shorting.
You will often find situations where fundamental analysis plays out just as you would expect.
If you can recognize the future potential of an asset, or realize that the asset is presently undervalued in the market, you can potentially profit.
In 2017 it was very trendy in crypto to rebrand a token and give it a new name and logo. A price increase would usually follow a rebrand.
However, over time this stopped having an impact.
Traders need to be able to recognize how fundamental changes like this are going to be received by market participants. In many cases it doesn’t matter how you feel about it, it matters how the market is going to feel about it.
Little changes can cause a big difference. Always think about:
- What changes are happening?
- How is the market going to react?
Of course, fundamental analysis is not limited to the reaction of markets to changes. Realizing the potential future value of the assets is essential.