Technical Analysis Compared to Fundamental Analysis

4tech050913There has always existed an active debate about whether one of these two famous and popular forms of analysis delivers the best trading results. The primary question is should you concentrate on one of them at the detriment of the other? Can you combine the merits of both?

This article is intent to provide important insights into these pertinent questions.

 

Technical Analysis Defined

Technical analysis is a method used to evaluate the underlying assets of spread bets by studying the statistics generated by historical market activity, such as past prices and volume. Technical analysts do not attempt to measure an asset’s intrinsic value but instead use charts to identify patterns that can suggest future activity. You will find that Technical Analysis can help you extensively improve your spread betting performance.

Technical analysis is a powerful tool that can aid you in forecasting the future directional movements of the underlying assets of your spread bets by analyzing their historical trading patterns. Essentially, you will aim to acquire a detailed understanding about the trading formations and trends created by the price of these assets. Even those investors who favor strategies based on fundamental analysis will still deploy the concepts of technical analysis as validation tools.

You must first appreciate that Technical analysis is founded on several key basic concepts. For example, this study focuses specifically on the price movements of assets and does not consider the sentiments or outlooks of traders whatsoever.

Technical analysis depends heavily on the viewpoint that the price history of an asset possesses a strong drive to constantly replicate itself by creating predictable price formations. Consequently, your primary goal will be to detect new quality entry opportunities for spread bets by learning how to recognize these repeatable formations.

As expert consensus expresses the opinion that the prices of assets advance in well-defined trends, they do not consider that their associated fluctuations are just random without any structure. For example, when they perceive that price has been proceeding for some time in its preferred direction then they will assume that it will carry on doing so unless a major catalyst emerges causing it to reverse course.

 

Fundamental Analysis Defined

You will discover that many traders utilize the theory of fundamental analysis with the intent of helping them construct spread betting strategies. Basically, this type of analysis attempts to predict the future price movements of the assets, which are used to support spread bets, by studying political, economic and environmental developments that will influence their supply and demand.

In particular, you must master how to identify when major news will be posted so that you can evaluate their impacts on your chosen securities. You should focus your attention on publications such as inflation figures, economic growth forecasts, new economic policies, interest rates changes and political developments, etc.

In addition, you will need to monitor the key statements and data expressed within speeches presented by renowned economists and politicians. In particular, you should concentrate on all major events pertaining to USA politics and economy since they can generate the biggest movements on the spread-betting market. For instance, speeches delivered by the President of the USA and by the Chairman of the US Federal Reserve can create significant price spikes.

You must realize that trading fundamental news proficiently will demand that you expend serious amounts of your time and resources mastering this subject. Expert opinion also advises that you implement a significant analysis of the past performance of each economic item that you intend to trade. This is because you will then attain a sound understanding about how the posting performs and what you should expect to happen at subsequent publications.

For instance, if you notice that a specific news item tends to create high volatility then you may deduce that you would be wise not to trade it. However, when deriving such a verdict always remember that past records are only a guide and you must not expect them to predict future activity with 100% accuracy.

You must also realize that this form of analysis is capable of producing major price spikes.  If you intend to devise a spread betting strategy based on fundamental news postings then you must initially record the scheduled times and dates of all key economic events. In addition, you must also detect those that can create the biggest price spikes as a top priority.

 

Comparing Technical and Fundamental Analysis:

The pros and cons of the two types of analysis will now be outlined.

 

Technical Analysis

Technical analysis encourages you to focus on objective data as it is centered on the trading performances of assets, displayed on charts. You can therefore obtain a good pictorial oversight about the past and potential future movements of those securities of interest.

However, this form of analysis has drawbacks as it does not concentrate on the fundamental aspects of assets.  For example, envisage that you have opened a spread bet based on a particular company. If you used technical analysis to assist in deriving this decision then you would have not investigated into how well this firm was performing in reality. As such, you would not know if the firm is making profits and how well it is currently competing against its key rivals within its designated market sector, etc.

 

Fundamental Analysis

The key advantage of fundamental analysis is that it provides you with insights about how well an asset is performing in reality. Expert traders and large financial institutions tend to lean heavily on this form of scrutiny in order to enable them to derive quality trading decisions.

As you will not have a clear pictorial picture in front of you when you perform fundamental analysis, you could encounter timing problems when implementing the entry and exit points of your spread bets. As such, you could be prone to lagging distortions as you can very easily activate positions later than you intended.

 

Combining Technical and Fundamental Analysis

Many professional traders use both types of analysis in order to exploits their merits to the full. For example, you could deploy fundamental analysis to assist you in identifying the optimum assets to trade. You could then introduce technical analysis to enable you to detect quality entry and exit points for your spread bets.

 

Summary

There is no simple answer to which one of these types of analysis supersedes the other as they both have powerful features. Whether you prefer one to the other or a combination of both really depends on your personality and trading style.

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