Technical analysis and fundamental analysis are the two main perspectives used by traders and investors to analyse the markets and predicts the next price move. Both have their pros and cons and in this article, we give you some clear definitions on what they are and why we believe it is important to use both.
Technical analysis uses charts, tools and indicators to identify trends, patterns and therefore try to forecast what the market will do in the short and long-term time frame. The most common indicators are: fibonacci retracements, moving averages, trend lines, candlestick patterns and momentum-based indicators.
Fundamental analysis is based on the general knowledge of the market that a trader or an investor is involved in. That includes overall economy developments, industry conditions, markets history, latest news and other elements that can have an impact on the prices.
How To Use Them
Typically, technical analysis is used within the trading platforms you’ve signed up for. Most of them will provide you with live charts and indicators to insert in order to get a good perspective of the current market conditions. Professional traders often uses several screens to track the evolution of the prices as they are involved in many differents trades and markets at the same time.
Let’s use a chart of ours as an example:
In this chart representing the BTC/USD price at the time of writing on a daily time frame, we have added the fibonacci retracements showing support and resistance levels, the moving averages over the last 18 days, trading volumes and the RSI (Relative Strenght Index) which measures the speed and changes of price actions. This chart gives us a good idea of previous movements on which we can base a forecast for the prices to come.
Since fundamental analysis is based on knowledge of the markets, the best way to keep being informed is to be subscribed to online websites or blogs related to the market you want to trade in. Obviously, it is also crucial to understand which fields have an actual impact on a specific market. For example, the monthly release of the US NFP (Non Farm Payrolls) which gives data on the current US employment situation is notorious to have a strong impact on the EUR/USD. Fundamental analysis require a lot of research to be fully aware and of these elements and be updated permanently.
Hand In Hand
We strongly believe that technical analysis and fundamental analysis should be used hand in hand in order to get the most accurate prediction of the future price movements. Since technical analysis gives us the tools to precisely analyse trends and patterns of a specific market at any given time, we do think that it’s application to trading is inevitable and should be used for any strategies, in any markets and for any time frames. Fundamental analysis have an impact on a market at a specific time. For instance, if a company release bad data on its revenue for the last quarter, the price of their stock might drop significantly for the next few days. Unless it is a critial event, it is unlikely that this will have long term consequences and if the stock showed great strenght and momentum beforehand on the technical side, most traders will see this drop as a buying opportunity.
This is why we think that the following 80/20 rule is a good starting point to base your decisions on: 80% technical analysis, 20% fundamental analysis. Obviously, this is not the only way to proceed but a perspective based on our knowledge and experience. As always, do your own research, read about different perspectives, make up your own and try it to see what works for you!