There are some topics that spark never-ending debate and sow discord among people. What to buy – iPhone or Android? Which football team to support – Manchester United or Liverpool? You might have noticed that there is no clear-cut answer to these questions. As the old saying goes: tastes differ. Every man to his taste: the one man’s meat is another man’s poison. OK, there are many variations of this saying, we’d better proceed to our actual topic. What we want to say is that traders have their own eternal debate about the best way to make profits in the financial markets. Which analysis is better: fundamental or technical?
What is analysis in trading?
First of all, let’s find out what a trade analysis means. Trade analysis is the most significant tool used by traders to make investment decisions. It is often said fundamental analysis tells you what to trade, and technical analysis tells you when to trade it. The trading process usually consists of three parts: preparing for trade, placing and monitoring the trade, and assessing the trade. Obviously, a trader makes most of the analysis in the first part. Thus, a trader’s success hugely depends on the quality of the analysis made. Although it’s common knowledge that a trader should rely on both fundamental and technical analyses, some traders still prefer one to another. Let’s go through both of them and you’ll be convinced that they are equally important!
Some traders consider themselves to be “technical traders”. They rely on the price movement patterns and technical tools in their analysis and don’t pay much heed to the economic news flow. The only thing that matters, according to them, is the price of the currency/financial asset. Other things are just distractors.
Technical analysis in Forex and stock trading
Technical analysis is the same for Forex and stock trading. A trader typically opens the chart and follows the price action to predict where the price will move next. He/she often uses different technical tools to recognize trends and trend reversals and also tries to identify some chart patterns. These tools are based on mathematical formulas, but traders don’t need to get into them as they are graphically represented for simplicity. When some technical indicators become a favorite for a trader, he/she can start creating his own investment strategy! To know more about technical analysis, you can read our technical analysis book.
Another team of traders disagrees with these “technicians” and advocates the fundamental way of market analysis. These guys scrutinize macroeconomic releases, pay attention to the news to unravel the future direction of the market – they are the adherers of fundamental analysis.
The first group of people is generally made of swing traders and short-term day traders who take positions for a day, several hours, minutes, or even seconds. Another group of traders acts more strategically; they prefer holding positions for days, weeks, or even months. They are the people of the virile, very strong character.
Fundamental analysis in Forex and stock trading
Fundamental analysis differs for Forex and stock trading. When a person trades currency pairs, he/she takes into consideration the dynamics of economic indicators and news events, gathered in the economic calendar. When a person trades stocks, he/she bases his/her bets on earnings reports, which reveal how the company performed in the previous quarter. To know how to trade on news and earning reports, read our article “Fundamental Analysis in Forex and stock trading”.
Comparison: fundamental analysis vs technical analysis
||Uses price movements themselves to predict future price movements.
||Explains which fundamental (economic) factors caused the price moves seen on the chart and what factors will determine the price movements in future.
|Source of Data
||Economic releases, news events
||Price formations and technical indicator signals
||Buy (sell) when the asset becomesunder(over)valued
|Type of Trader
||Short-term day traders
||Usually long-term position traders
||Position is held for days, hours,minutes, seconds
||Position is held for days, weeks, months
||Dow theory, support &resistance, price patterns
||Comparison of the actual economic figures with the expected/historical readings
Both fundamental and technical analysis have their advantages and drawbacks, so it’s best to combine these 2 methods. This way you will get the fullest view of what is happening at the market. While trading on the intraday use technical analysis first to determine the state of the market, trade entry and exit levels. Then use fundamental analysis to adjust your strategy taking into account events of the economic calendar. In the longer-term trade firstly determine the trend with the help of fundamental analysis and then look for an entry and exit point using technical analysis tools.
You will learn more about fundamental and technical analysis from this course.