Bites Of Trading Knowledge #11

What is Fundamental Analysis? -

Fundamental analysis is a method of determining a market’s “real value” or "fair market" value through the collection and examination of financial and economic information. Information gathered may include financial metrics which identify business drivers of the market, and could involve financial modeling of the market.

Fundamental analysts search for markets that are currently trading at prices that are higher or lower than what is expected to be their fair market value.  If the fair market value is calculated to be higher than the market price, the market is deemed to be undervalued and could be considered to be bought. Conversely, if the fair market value is calculated to be lower than the market price, the market is deemed to be overvalued and could be considered to be sold.

What is Technical Analysis? -

Technical analysis is a method employed to evaluate a market and identify trading opportunities with a focus on inputs that include price and/or volume. Various financially based calculations and statistical models are commonly employed to derive price trends and patterns based upon which trading decisions are made.

Technical analysts believe past trading activity and price changes of a market could be valuable indicators of a market’s future price movements.

Common application of financial market instruments for managing risk and opportunities.

Portfolio Diversification

Portfolio diversification is the process of investing your money in different asset classes and securities in order to minimize the overall risk of the portfolio.

For both corporate and individual investors, having access to markets that enable the building of a diversified portfolio is an important consideration when managing futures focused accounts.

Similar to managing risk, the market to trade would be a key variable to clearly state and support with reasons for trading or investing.  Reasons for selecting one market over another could include price volatility, liquidity, daily volume traded, size of the minimum price increment, and value of the minimum price increment. Comparing these variables between markets will help decide the suitability and/or risk of each.

For example, the parameters for a price driven strategy may be designed to be applied to any market whether it be index equity futures or forex futures.  However, the signals for entry may not always trigger if a trader were just to focus on a single index equity futures such as the Micro MSCI Europe Index futures.   Having access to other futures markets, such as the Mini Onshore Renminbi/US Dollar Futures, can introduce both a foreign currency and Asian element to a portfolio.  This allows for the creation of a diversified portfolio with varying entry and exit points, or the ability for more trading oriented investors, increased opportunities to execute price driven strategies more often across a range of futures markets.

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TRADDICTIV · Research Team

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