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Fundamental Analysis and Position Trading

| January 8, 2021 | By

In the world’s financial markets, fundamental analysis is a go-to methodology for legions of active participants. When coupled with position trading strategies, the two disciplines provide a robust framework for consistent decision-making.

Read on to learn how fundamental analysis and position trading can help you achieve your market-oriented objectives.

What Is Fundamental Analysis?

Fundamental analysis is the study of external information to determine a security’s intrinsic value. Intrinsic value is what an asset is really worth, not necessarily its price. By scrutinizing relevant market factors, or underpinnings, fundamental traders attempt to cash in on discrepancies between price and value.

One of the critical duties fundamental traders are tasked with is identifying pertinent data. Vast stores of information are at the modern trader’s fingertips, which means ignoring the noise and valuing a market’s vital underpinnings is the name of the game. Here are a few key fundamentals for several leading asset class:

Asset Class Fundamentals
Equities Economic data, corporate financials, political policy
Currencies Interest rates, economic data, monetary policy
Energies Supply reports, consumption data
Agricultures WASDE reports, industry projections
Metals Institutional activity, inflation measures

It’s important to remember that asset pricing is relative to evolving levels of supply and demand. Accordingly, a large portion of fundamental analysis deals with identifying trends in production, consumer behavior, finance, monetary policy, and governmental regulation. If a trend becomes apparent, then the combination of fundamental analysis and position trading may produce big returns.

What Is Position Trading?

Position trading is the act of opening and holding live positions in the market for long durations. A position trade may last for weeks, months, or years before being closed out. Given the extended time horizon, position trading is often characterized as investing

The longer-term nature of this trading strategy removes the importance of short-term price action. That’s why fundamental analysis and position trading complement each other so well. A trader ignores short-term market volatilities because capitalizing on macro trends is the primary objective.

The application of position trading strategies is nuanced according to the market. Here are a few considerations per asset class:

  • Stocks: Buying and holding equities is a traditional form of position trading. The need for precise market timing and the risk of taking short-term losses are minimized.
  • ETFs and mutual funds: Holding ETFs and mutual funds indefinitely may incur significant account management and maintenance fees.
  • Futures and options: Futures and options contracts are subject to expiration. In order to hold positions for extended periods, you must periodically roll open positions over to a new front-month contract or trade a deferred month issue.
  • Currencies: Forex rollover rates are the costs involved with holding active positions through daily settlement. Over the course of weeks, months, or years, rollover fees can be substantial.

Any trades are educational examples only. They do not include commissions and fees.

Combining Fundamental Analysis and Position Trading

The marriage between fundamental analysis and position trading is readily observable via a real-world example.

Assume that Oliver the oil trader is looking to open 2021 with a solid trade in West Texas Intermediate (WTI) crude oil. As 2020 comes to a close, Oliver breaks down the market’s key underpinnings:

  • Supply: Late-2020 statements from OPEC+ suggest that production is likely to remain depressed for some time. Also, U.S. political movements may result in a swift reduction to North American fracking output. Both are indicators that forthcoming supply gluts are highly unlikely.
  • Demand: The delivery of COVID-19 vaccines and the development of therapies are expected to expand in 2021. If successful, future consumption of refined fuels won’t be hampered by economic lockdowns or travel bans. Given this scenario, demand will be in a position to spike year-over-year.
  • Economic cycle: An uptick in U.S. inflation for December 2020 suggests that a weaker USD could be the story in 2021. Assuming the Fed sticks to its dovish commitments, dollar devaluation will send WTI higher over the coming 12 months.

After an extensive study of global crude oil fundamentals, Oliver decides to take a long position in WTI. To execute the trade, Oliver buys three contracts of January 2022 WTI crude at $46 per barrel. With January 2021 WTI trading at $46.75, January 2022 is purchased at a $0.75 discount due to normal backwardation.

Successful futures traders understand the importance of continuous education and improvement. To learn more about how fundamental analysis and position trading can influence your trading, check out our blog. It features expert market analysis, trading strategies, and much, much more.

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