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B eneath every market and every piece of paper or digital that says you have purchased a stock, forex contract, future, or option is an actual asset, something that has a real intrinsic value to it. For some traders and investors, they look for ways to capitalize on that intrinsic value by trying to figure out something that other traders and investors might not have taken into consideration.

Earnings per Share (EPS), Return on Equity (ROE), Price-To-Earnings Ratios (P/E Ratios), Debt to Equity Ratios (D/E Ratios), Supply and Demand, Interest Rates, Yield Curves, Crop Reports, Yields, Profits and Losses, Monetary Policy, GDP, and more make up some of the terminologies used when we are talking about fundamental analysis.

In technical analysis, the belief is that the market moves based on its own emotions, psychology, mostly that of being fear and greed. Whether that is true or not, fundamental analysis believes that the news that triggers the fear and greed lives within the fundamentals. Each time the forecast changes so do the sentiments of the traders.

Before we dig into how to understand monetary policy, take in a natural disaster, and interest rates, let us put our focus on what most of the fundamental analysis was built around–financial statements of companies.

We will first look at the balance sheet. A balance sheet, which is occasionally called “Statements of Financial Position,” details how much a company owns (what assets it has), how much it owes (what liabilities it has), and where the difference is between the two (its equity). The equity represents the shareholders' interest, giving value to what they are investing in. For those, like me, who might have found the whole balance sheet thing a slosh and difficult to stay awake in class, I assure you, there is a simpler way to understand it.

And even if you are not planning on using fundamental analysis in your trading, it may be important to be able to take in this information and understand it more thoroughly. Plenty of people have gone broke because they did not know how to figure out what was going on. As we will go over in Rules of Trading, knowledge, even unused knowledge, can be important in adding that emotional covering needed to take action and get results.

Though the image we have here may not be exactly what you will get from the financial statements of companies where they will break down earnings per share and such, this is pretty close and a great place to start to understand what value a company is producing.

Assets are given a larger leeway than what is completely shown here. Instead of Cash in Bank, it is often structured as Cash and Equivalents. The equivalent part is based on what is to be considered liquid and steady investments, whether it is bonds, T-Bills, or anything else.

Fundamental analysis of the commodities market relies a lot on the supply and demand of its underlying asset. When the oil is abundant, the price of oil goes down. When there is a war in the Middle East that could potentially slow oil, the price goes up. The entirety of the commodities market works on this supply and demand methodology. This is why the fundamental analysis of these markets is both easy to comprehend and a lot more difficult to take in fully.

During the current Trade War with China, soybeans have locked limit-down several times, grains and livestock have consistently been overproduced at the expectation that the trade war might come to an end. This has opened up huge opportunities to short these markets, and plenty of people have been selling these markets heavily for the past year and a half on just the fundamental picture alone.

But a person can use other fundamental analyses. Weather patterns are one that comes off sounding like some ridiculous magic trick to predict the markets. But, when it comes to oil, storms on the coast can affect production, driving prices up. Lack of storms can create higher yields and drive prices down, allowing people to speculate accordingly.

Then, you have treasury bonds, federal notes, and other financials that you can trade on the market. These things are weighted by economic and monetary policy as well and how they could potentially affect the interest rates and production on these instruments. Gathering this information oftentimes is economically dependent, which is to say that when an economy is strong, they often like to raise the interest rates because a strong economy can withstand it. When the economies are weak, interest rates are cut to promote growth and debt spending.

George Soros, the man who broke the bank of England, did so on a largely fundamental understanding of what would happen with England’s Pound Sterling as it began to have issues once it joined the ERM (European Exchange Rate Mechanism). The ERM was a tool to keep European currency fixed instead of letting markets determine the rate of exchange. Germany, being the dominant economy at the time, with the strongest currency, was what the currency was measured against. England, due to a slump in their economy and speculation running against their currency, joined with the promise that they would keep their currency at a certain rate. As it was trading at the bottom end of those rates, speculators had begun to come in and bet against the value of the currency and the resolve of Britain to keep the price of the currency up artificially.

Soros and his Quantum Fund were quietly building a short, but the weaker it became, they quickly took their position from 1.2 Billion to shorting over 10 Billion dollars. As the pound got devalued, England could not do anything to stop the price from falling, so they were forced to withdraw from the ERM, and bring their currency to the market. Their attempts to strengthen it after that saw it too fail and watched the currency tumble.

This all started from a fundamental understanding and projection of the weakness of the British Pound and understanding the fundamentals of what the government would be forced to do should they not be able to support the price.

Currency is all about the country’s economy and monetary policy. What a country does to stimulate the growth of its economy is determining what will happen to their currency.

It took months for those trades to come to fruition, which means that once these markets begin to break, either up or down, you have good solid trading opportunities to take profit over a few days to week or two. There were likely huge trades to be made in the currency market, and these things happen a lot. Not to the caliber of Britain, of course, but they happen, and if you know what to look for and how to get the big picture, you can capitalize.

Buy the rumor and sell on the news. This adage is as important and correct when it comes to trading on a fundamental perspective as anything. Look, fundamental investing allows you to have time, to wait out your position, and to play the fluctuations. But swing trading does not give you that luxury. You need to get results and you need to get them quickly. That makes the news your friend. Playing strong company with great talks, assumptions, and thoughts (what passes for news today), and playing it off of the actual truth, whatever that may be, is the key to successful swing trading when it comes using fundamental analysis.

Another method is riding the wave or good or bad facts and information. The company had a record year, so it is likely going to rally while it is fresh in people’s heads. It is a good time to buy and ride out that rally for all it is worth. The stock had a crappy year; it is likely to crash even further as people lose their sentiment of the company and start to devalue it across the board. This creates waves of movement in the stock and allows you to capture a nice piece of profit from it.

Another method to consider is a big news event. The surprise, as it may be. When something goes good or bad, it is time to buy or sell and ride out the people who have to get into their positions or to get out of it. Either way, the surprise creates a burst of action and if it alters the fundamentals of the company, it is time to alter your position as well and take the rewards for that move.

Markets, as John Maynard Keynes observed, can stay irrational far longer than you can stay solvent. About 80% of all major trading losses throughout history have happened in regard to some form of fundamental analysis of the market and people taking on a position they thought could not go bad. The entire collapse of the market and nearly the economy in 2008 was a result of that very blindness that fundamentals can change very quickly.

Lehman Brothers were, on a fundamental picture, still a strong company, and Jim Cramer was still telling people to hold Bear Stearns stock right as it got sold for $2 a share. Both of these companies got into the predicament they got into because they made what was a fundamentally strong case that the housing market would never collapse. So, traders sold tens of billions of dollars of credit default swaps against the underlying value of certain bonds. These were considered hugely safe bets, and the people buying the swaps were seen as crazy and even demented speculators that had no clue what they were talking about. Of course, time proved them wrong.

The other major pitfall with fundamental analysis is that a lot of times, it does not give you a point to get out of the trade or into it. This can be a huge problem because you are usually going to be throwing darts at a board when it comes to using this method for choosing your entry and exit points. But, with a few steady rules, you will have a bigger picture and idea of what to do.