With the ever-increasing use of virtual currency and the high volatility of the market, cryptocurrencies are being adopted across the world for various transactions. Cryptocurrency derivatives trading is a relatively new trading area that is currently perking the interests of daytime traders. If you’re new to this type of trading, don’t worry, Bybit is here to guide you through its ins and outs. In this article, we will give you a basic introduction of what is fundamental analysis, and two common mistakes which befall even the most experienced of traders when dealing with this concept.
What is Fundamental Analysis
So what does it actually mean? In a nutshell, fundamental analysis is the process of evaluating a security’s true value by analyzing economic, financial and other key factors. Considering how volatile the price of cryptocurrencies can be, it could be seen a good way of finding out what the true value of Bitcoin, for example, really is.
Many futures traders, however, have traditionally held the view that fundamental analysis does not work. At least, that is the conclusion a significant amount of many futures traders have drawn from their own experiences.
The fact of the matter is that much what passes for fundamental analysis is either incomplete or incorrect—and frequently both. The trader who ignores fundamental analysis completely is almost certainly better off than the trader who uses fundamental analysis incorrectly. However, this in no way alters the fact that good fundamental analysis done correctly is a useful, and even powerful, tool.
Two Common Mistakes of Fundamental Analysis
When viewing how to do fundamental analysis, it is definitely a good idea to look at some common mistakes that traders do when trying to undertake the fundamental analysis.
There are many fallacies surrounding the concept, which may lead not just novice traders to make mistakes. Let’s take a look at two of the most common:
1. Viewing Old Information as New
Financial news outlets frequently report old information and new information in much the same manner. However, in a volatile market, what may be relevant last week, may not be relevant today. The main point to keep in mind is that much information that sounds new is actually old news, long discounted by the market. Therefore, doing research on if the information is still relevant is crucial.
2.Using Fundamental Analysis for Timing
Fundamental analysis is a method for gauging what price is right under given statistical conditions and can be used in constructing annual, quarterly, and in some instances monthly price projections. However, it is ludicrous to attempt to boil supply-demand statistics down to the point at which they provide an instantaneous price signal, which is exactly what some traders do when they rely on fundamental analysis for timing trading on the basis of market websites, newspaper articles, and newswire stories.
It is no surprise that speculators who base their trades on such items are usually spectacularly unsuccessful. The only major exception is those traders who use this type of information in a contrary way, such as viewing the failure of the market to rally after the release of a bullish newswire story as a signal to go short.
The fundamental analysis researcher must also guard against the natural instinct of wanting to take a market position right after completing an analysis that indicates either an underpriced or overpriced situation. The market is not aware of the timing of a researcher’s personal price discovery. Even if the analysis is correct, the right time may be three weeks or even three months off. In short, for purposes of timing, even the fundamental analyst should use some form of technical input.
Hopefully, now you have a deeper understanding of what is fundamental analysis and two common mistakes not to make. Happy trading!