Pros and cons of fundamental analysis
Pros of fundamental analysis
Fundamental analysis helps traders and investors to gather the right information to make rational decisions about what position to take. By basing these decisions on financial data, there is limited room for personal biases.
Rather than establishing entry and exit points, fundamental analysis seeks to understand the value of an asset, so that traders can take a much longer-term view of the market. Once the trader has determined a numerical value for the asset, they can compare it to the current market price to assess whether the asset is over or under-valued. The aim is to then profit from the market correction.
Cons of fundamental analysis
Fundamental analysis can be time consuming, it requires multiple areas of analysis which can make the process extremely complicated.
As fundamental analysis takes a much longer-term view of the market, the results of the findings are not suitable for quick decisions. Traders looking to create a methodology for entering and exiting trades in the short term might be better suited to technical analysis.
It is also important to consider the best and the worst-case scenario. While fundamental analysis provides a more well-rounded view of the market, it is possible for negative economic, political or legislative changes to surprise markets.