There’s a great debate in the financial industry about which type of analysis produces the best results for traders - is it better to be a technical trader or to rely on the fundamentals?
Is there a common ground between the two? We’ve all heard the phrase All roads lead to Rome. In this article we’ll explore whether this applies to the financial markets.
Technical analysis refers to the use of past market data, such as volume and price, to predict future price movements for a particular security. Throughout the years, technical analysis has emerged as the most common method for evaluating the financial markets. Through the use of simple and advanced charting techniques, traders can recognize patterns, identify trends and reversals, and determine entry and exit points in a particular market. Technical analysis is less concerned with measuring the intrinsic value of a security. Instead, it seeks to identify the security’s past performance to understand its future behavior.
Unlike technical analysis, fundamental analysis is all about measuring the intrinsic value of a security, including its economic, financial and other qualitative and quantitative factors. A fundamental approach to trading looks at how these variables impact the value of an asset. Traders who perform fundamental analysis usually keep a close eye on the economic calendar, which conveys important market-moving information, such as economic data and central bank announcements.
What type of trader are you?
Clearly, both approaches to the financial markets have their benefits. Technical traders base all of their moves on past performance, which allows them to more accurately predict breakouts and reversals. However, a narrow focus on the charts ignores the underlying economic and financial landscape that houses market information. Neglecting the economic calendar also means you lose out on key developments that have the most impact on the financial markets. Understanding whether or not interest rates are going to rise and whether an economy is headed for recession are crucial if one is to become a well-rounded trader.
Fundamental traders tend to have a sound understanding of where the market is headed, and for that reason usually make sound value investors. They’re usually well informed about which securities to buy for the long haul, based on current market information. However, it’s difficult to become an active trader using solely a fundamental approach. In fact, the vast majority of market movements are driven by technical analysis. Fundamental traders should therefore have a small handful of technical indicators they can use to confirm trends and reversals.
From these examples, it’s easy to see how a trader can combine both technical and fundamental analysis to become successful. A technical approach tends to prevail most of the time, but fundamental analysis gives you a better view of the big picture. Both help traders develop a holistic view of the financial markets, and this is absolutely necessary for success.
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Warning: Remember, particularly if you are new to trading in the stock market and in forex, that the prices of shares and other investments can fall fast and you may not get back the money you originally invested. The material here is for general information only and is not intended to be relied upon for individual investment decisions. Take independent advice before making such decisions. Also, the BullBearings free stock exchange simulation portfolios are a good way to practice trading techniques.
Thu, 1st Jan - * (ShareCast News) - Banks and miners led the FTSE to a lower close Friday, in a session awash with blue-chip news including disappointing annual results from Royal Bank of Scotland and Standard Chartered, among other stocks reporting.