Introduction to Fundamental VS Technical Analysis
In the world of trading, there are two key methods of market analysis which traders employ to predict price movements and make wise investments. These two methods are known as Technical Analysis and Fundamental Analysis.
The main difference between Technical and Fundamental Analysis lies in the factors they consider to analyse the financial markets. To determine how an asset or a commodity may perform in the future, Technical Analysis looks back at historical performance and general price movements. On the other hand, Fundamental Analysis focuses mainly on social, geopolitical and economic events to predict the impact that they may have on an asset’s price.
Fundamental Analysis Basics for Beginners
Fundamental analysts generally take several factors into account when looking at particular currencies. You can get a good idea of Fundamental Analysis basics and how to use them once we group these factors into two categories:
Economic, geopolitical and social phenomena that may influence the economy, economic outlook and overall market sentiment regarding a particular country or region.Such phenomena include natural disasters, such as extreme weather conditions, earthquakes and hurricanes, that may cause severe damage and have a negative impact on a country’s economy. Other fundamentals that analysts consider are wars and periods of conflict between countries, which naturally trigger a sense of uncertainty and destabilise the economy of the countries in question. Political events such as presidential elections may also have an impact on currency value and affect the economic stability of a country.
News stories, data announcements and reports, also known as economic indicators, that measure the economic performance of a country or region.Economic indicators are often released by governments and private organisations, and give insights into the different sectors within a country and how these perform. By so doing, they reveal economic stability or decline and have an impact on market sentiment upon their release. Major economic indicators include the Consumer Confidence Index (CCI), the Consumer Price Index (CPI), Gross Domestic Product (GDP), Non-farm Payrolls (NFP), and the Unemployment Rate.
Technical Analysis Basics for Beginners
To understand the financial markets and determine future price action, technical analysts study trend lines, patterns on price charts, and employ technical indicators and oscillators. Let’s look at some Technical Analysis basics to explain how to use them while trading:
Trend LinesTrend lines are lines drawn on price charts, connecting two major tops or bottoms in price movements so as to understand whether an asset is experiencing an uptrend or a downtrend. By definition, uptrends depict higher highs and higher lows, while downtrends are determined by lower highs and lower lows. In sideways/horizontal trends, the highs and lows of an asset’s price remain at similar levels.
Support and Resistance LevelsBy definition, support and resistance levels are two price levels which an asset’s price is seen to test time after time, while failing to move below or above. Identifying these levels helps traders know when to go long or short, keeping in mind that the more times an asset fails to move beyond a specific price level, the stronger this price level is as a support or resistance level.
Chart PatternsChart patterns can be detected on an asset’s historical performance and give particular insights regarding the asset’s behaviour. As a trader, what you must remember is that patterns on price charts can be either continuation patterns or reversal patterns, signifying either the continuation of a trend or the reversal in price action, respectively. Some of the most basic and popular chart patterns are Double Top and Double Bottom, Head and Shoulders, the Rising and Falling Wedge, as well as Symmetrical, Ascending or Descending Triangles.
Technical IndicatorsA technical indicator is a mathematical process which is applied to historical price action in order to reveal the strength, volatility, volume and momentum of the price movements of a particular asset. There are two types of indicators, namely, leading indicators (or oscillators) and lagging indicators, giving signals prior and after trends begin, respectively. As a trader, you may find technical indicators particularly useful in your trading, since they can be used to detect the beginnings and endings of trends and identify promising trading opportunities. Keep in mind, though, that the success rate of technical indicators is not always 100% and they may at times give fake signals.
Fundamental Analysis VS Technical Analysis: What to Choose
For traders, there is no question of using either Fundamental or Technical Analysis, since both methods are considered to be equally important in understanding the financial markets. Rather than employing one of the two schools of thought, it is preferable for traders to study both in order to enhance their trading style and achieve their goals.
Both methods are therefore indispensable to the process of trading. In a battle between Technical VS Fundamental Analysis, neither of the two would win. Let’s look at an example to explain why this is the case:
As a trader, let’s say that you mainly focus on Technical Analysis to trade one particular currency pair, namely, EURUSD. You look at its historical performance, analyse price charts and detect patterns using technical indicators. Yet, what you will soon discover is that, no matter how capable you are with studying chart patterns and trends, you will most likely fail to invest successfully in EURUSD if you don’t closely follow the news, political developments and economic events in the United States and the Eurozone. Concentrating only on political events without looking at how EURUSD performed in the past would likely be equally catastrophic for your account balance, since you would not have a clear picture of what is or isn’t likely to affect this currency pair.
Regardless of whether you prefer to employ Technical or Fundamental Analysis, then, it is recommended that you try to understand the fundamentals of both methods so as to equip yourself better and enhance your trading strategies.