The Differences Between Technical and Fundamental Analysis

Knowing the differences between technical and fundamental analysis is hugely important if you want to create a winning trading strategy. You need to know which analysis is going to suit your trading style the best, and which one you’re most comfortable with. That’s why understanding what makes the two analyses different is so crucial, and it’s what this article is all about. Once you have a firmer understanding of the differences between technical and fundamental analysis, you can more easily make your all-important trading choices.

Fundamental Analysis

Fundamental analysis is useful when it comes to evaluating many different kinds of trading instruments including commodities, indices, shares, and currencies. This kind of analysis allows traders to look deeper into economic factors which might affect their trade, for example, such as the GDP of the country, what the unemployment levels are, what the health sector is like, and even what individual company profitability is showing as.

All of this data is known as fundamental, and it is the understand and analysis of this that can lead to easier decisions being made over trades. Take shares, for example. Using fundamental analysis to evaluate the news, sector conditions, company performance, and much more, it is possible to determine what those shares are most likely to do in the future.

Technical Analysis

If none of the above is of interest and you don’t enjoy looking at so much information when it comes to your trades, technical analysis may be more suited to your style. Those who use technical analysis to determine their trades will only look at price charts. For them, everything you could possibly need to know about a potential trade can be seen in the price chart, no matter what type it actually is. Everything is reflected in its price.

That doesn’t mean, however, that technical analysis is any less in depth than fundamental analysis would be; it simply means that there are fewer elements to take into account. You will still need to look closely at price trends and chart patterns as well as mathematical chart indicators to determine whether the trade is going to be worthwhile.

When it comes to short term trading, most people use the price charts – and therefore technical analysis, such as the Fibonacci Queen Carolyn Boroden . That’s because the movements that need to be considered are much smaller than on the longer term trades. As well as this, since news is constant it no longer has quite the same impact on the markets as it once did.

Making The Choice

When you’re a new trader the choices you need to think about – and eventually make – can be confusing. What kind of analysis is going to be best for you? Which approach is the one that will make you most successful? Both technical and fundamental analysis can ensure profitable trades, but not everyone is happy using them time and again.

Is it possible to blend the two and create something that feels more comfortable and positive? The answer is yes.

It all starts with being aware of the news. When something big is announced, this can have an impact on the markets, particularly is the announcement is to do with the economy or politics. These are the times to check the charts to see what changes are occurring. But you can also look at new interest rate announcements, unemployment figures, and more – these can make the markets move. So although you might not be aware of everything that is happening, these important factors should be taken into account. Trading without checking the news is not a good idea; you might find that you lose money quickly this way.

Risk Management

A combination of technical and fundamental analysis can also be useful when it comes to risk management. The economic news stories won’t tell you everything; they will give you an overview of the situation, but that might not be enough to help you make a decision. By looking at using the fundamental analysis approach, however, you can manage your risk more easily – you can see the effects that specific situations have created in the past.

Using a blended method of both types of analysis will also help traders to confirm the trends they are looking at. Take the interest rate, for example. If many people are expecting a rise but that rise does not materialise, the currency often falls. If, however, the currency keeps rising even if an interest rate rise is not announced, what else could be causing it? The interest rate is clearly not something that needs to be considered, so it can be discounted in the future.

There is no guarantee, of course, that you will be right one hundred percent of the time no matter which option you choose and which one works best for you. You simply need to find the best way you can to be as successful as much of the time as possible.