As a prop trader, you need to know how to analyze a trading situation and evaluate how to take your next steps. You’ve likely heard of the boons of technical analysis, but you need fundamental analysis skills as well.

What makes fundamental analysis different, and how do you practice it? As one of the top proprietary trading firms in NYC, we pride ourselves on our ability to make positive trading decisions and teach others how to do the same. Black Eagle Financial Group has everything you need to know about using fundamental analytics to boost your trading performance.

What Is Fundamental Analysis and How Can It Help?

Fundamental analytics focuses more on past and present data in various areas to help determine the underlying drivers for current price fluctuations. You can think of technical analysis as reviewing previous charts for future conclusions and fundamental analysis as understanding why current charts move the way they do now.

You look closely at fundamental details that helped shape the asset’s current value and where you can expect it to go, including:

• Industry analysis
• Intrinsic value of the asset
• Overall state of the economy
• Company performance metrics

Using Fundamental Analysis To Value an Asset

How do you know how much an asset is worth? What should you base this knowledge on? Fundamental analytics seeks to answer these questions, attempting to predict an asset’s value and how much you can expect the company distributing it to improve.

Fundamental analysis runs on three primary assumptions:

• First: The current stock price usually doesn’t reflect the actual value of a company compared to available financial data.
• Second: You need to look directly at the company’s fundamental data points to parse their asset’s actual value.
• Third: The stock market will eventually reflect the fundamental details you discover about the asset. However, it can be difficult to determine when the direct reflection will occur since it can take weeks, years, or even decades.

You may already use fundamental details in any trades you make. You use fundamental analysis if you look at the company, how it runs, and its overall economic behaviors.

For example, you have your eyes on an asset in an industry you know well. Because this is a new company, the asset’s current value sits at $6 when industry-typical prices are around $40. Using the information channeled through fundamental analysis, some traders anticipate the asset’s intrinsic value to be $52, while others say it’s $46.

Perhaps, from your evaluation, you find it somewhere between those amounts. Regardless, any fundamental trader would likely suggest buying in on the asset now due to its high intrinsic value compared to industry standards. You want to secure the asset early to enjoy a high return on investment once it reaches its assumed potential.

Types of Fundamental Analysis

A wise prop trader will compare an asset and its distributing company with other companies with similar assets. You can use qualitative and quantitative data to make better stock market decisions.

Quantitative data, of course, refers to definable numbers or details you can much more firmly value. Examples of this data include financial statements, balance sheets, and cash flow reports.

Qualitative data can be more difficult to evaluate, especially because each trader may see different qualities as more important than others. Some examples can include proprietary technology, brand-name recognition, or evaluations of the company’s top executives.

In general, the best fundamental analysis incorporates both data types to draw a conclusion. After all, if income numbers temporarily increase, poor management quality could make those gains unmaintainable. Conversely, a high-quality business executive can still fail to increase an asset’s value due to economic indicators outside their control.

Illustration: Using Analysis Wisely

Industries often require different functional modes from each other to boost the quality of their assets and general products. Even in a general industry, sector requirements can shift with a higher focus on several factors.

For example, consider the food service industry. Fast-food and dine-in restaurants need high-quality employees who can work quickly while providing amicable customer service. However, each company can categorize its qualitative and quantitative necessities differently.

A fast-food restaurant may value speed more than a dine-in, and their cooks may not need much experience if they work consistently. Dine-in cooks typically require more experience and can afford to take longer to provide the food due to the higher quality expectations. 

Dine-in restaurants can price their products higher than fast food without too much customer pushback. Meanwhile, fast-food restaurants need their food to be good enough to get out quickly for fast customer satisfaction.

Those comparing these industries and companies within them may find the data to differ too much to make a high-quality assertion about their assets. Instead of comparing a fast-food restaurant to a dine-in, you may benefit more from checking the value of an older chain versus a newer, incoming fast-food company. Be smart about who you compare and how you do it.

Using Fundamental Analysis for Your Benefit

Using data through fundamental analytics, you can change the way you trade:

Investment Management

With technical analysis, you look at actions from the past to help determine the future. With fundamental analysis, you look at present information to evaluate future growth in long-term aspects. High-quality analysis can help you increase the value of your portfolio over time, allowing you to receive feedback from compounding returns.

Risk Identification and Capital Preservation

Although this ties in with trading psychology, you need to have good reason to stick with or sell your assets. Together, technical and fundamental analyses can identify potential investment risks while helping you time your entry and exit strategies to mitigate or prevent losses. In especially volatile market conditions, using these analyses can be the difference between high capital maintenance and exponential loss.

Increasing Trading Reliability and Confidence

Every prop trader must start somewhere. If you use your resources wisely, you can make better trading decisions backed by logical conclusions. While every trade may not be as successful as you’d desire, you can take pride in reducing losses and increasing portfolio value one step at a time.

Build Your Trading Confidence With Black Eagle Financial Group

Black Eagle Financial Group is looking for new and experienced traders who want to improve their skills! We work as a hedge fund, financial services company, and prop trading firm with a proven track record of success. Our team has access to worldwide markets and various trading platforms. It creates customized mentorship plans that can teach you the psychology of trading or how to use fundamental analysis. To learn more about what we offer and how we can improve your trading habits, contact Black Eagle Financial Group toll-free at +1 (833) 253-2453 or visit our contact page today.