Technical Tuesdays: Fundamental vs. Technical Analysis in trading
The global markets are rich with opportunities for traders and investors able to predict which way the markets will move. This type of analysis goes beyond a mere educated guess and a correct prediction could mean the difference between high profits and potential loss.
There are two primary schools of thought when it comes to trading – fundamental vs technical analysis. The idea of mixing technical and fundamental analyses is not always well received by experienced traders, however, there are benefits to understanding both.
Fundamental analysis is a method of measuring an asset’s value in relation to economic and financial factors. Let’s take Amazon for example – using fundamental analysis, you would look at the overall state of the economy and the strength of a specific industry/sector (i.e Technology, eCommerce) Amazon performs in. You would then look at individual company performance to arrive at a fair market value for the stock.
Technical analysis looks at the price movement of assets and using this data attempt to predict future price movements. Using this method you would focus on analyzing the stock for clues about where the price may be headed.
Overall, the primary difference is that technical analysts view a company’s charts, while fundamental analysts begin with a company’s financial statements.
Two schools of thought
Fred Razak, senior trading strategist at CMTrading, said: “This is probably the oldest and biggest argument between the two schools of thought – those that trade fundamental analysis and those that trade using technical analysis.
“Fundamental analysis is the analysis of data over long period of time and then being able to make decisions about the future. It’s about using that data to make future predictions as to the direction of the market. So there’s a little bit of a pattern of technical analysis in it because ultimately they’re using data to kind of making decisions about the future.
“So it borrows a bit from technical analysis but it’s the formation of looking at data. For example, it’s looking at CPI (core price index number) numbers and inflation figures to see if there’s a certain pattern. It’s looking at consumer confidence numbers to see if consumers are growing confident in the market or lessening confidence in the market. It has a lot of data but the data is sometimes based on psychological trends. So we’re stealing a little bit of technical analysis here into fundamental analysis because you’re using these trends to make decisions about future predictions about the markets.”
Discover the secrets to fundamental vs technical analysis below: