Technical vs. Fundamental Analysis: Which Method Actually Makes More Money?
Each successful trader — one who consistently earns returns — must have some reliable method by which to analyze the markets and decide when to buy, sell and/or hold his or her positions. The two schools of market analysis – fundamental vs. technical – have been at each other’s throats for decades, given their fervent adherents on each side. Price patterns and charts are important to technical analysts who think that everything is already priced in to the market. Fundamental analysis looks at economic numbers such as employment data and company balance sheets to find intrinsic value. Most professional traders, especially in proprietary trading, follow a combination of the two to achieve consistency, and to meet their growing performance targets.
Technical Analysis: The Language of the Markets
Technical analysis is based on the assumption that prices move in trends and that historical price data can be used to predict future price. This method centers on chart patterns, support and resistance levels, and technical indicators such as moving averages and RSI. Technical analysts are of the opinion that market psychology is always repeating itself and patterns recur, so useful signals can be found therein. The advantage of technical analysis is that it works on all timeframes and all markets, which makes it most suitable for short-term trading and picking entry and exit points.
Core Technical Analysis Tools
- Trend Analysis: Discover when markets are going up, down or sideways with the help of trendlines, and moving averages to determine trading decisions, and always trade at the right direction.
- Support and Resistance: Identify established price points, in which demand or supply tends to exhibit, as manifested through high volume and open interest levels.
- Chart Patterns: How to recognize formations of head and shoulders, triangles, flags and the like that often precede a major price movement.
- Volume Analysis: The volume can be used to validate a price move plus to verify trends reversal or continuations.
Fundamental Analysis: Understanding True Value
The fundamental analysis is an analysis based on underlying economic factors, company performance, industry outlook and macroeconomic conditions to determine an asset’s intrinsic value. In the stock realm, that means combing through financial statements, earnings growth, debt and competitiveness. In case of currencies, Fundament analysts also take interest rates, inflation, and employment data, and political stability into account. This method is most useful for long-term investment and identifying overvalued or undervalued assets based on its historic fundamentals.
Key Fundamental Indicators
Economic indicators such as Gross domestic product (GDP) growth, unemployment rates and estimates of inflation show the general direction and health of the economy. For companies, metrics including price-to-earnings ratios, revenue growth and profit margins help determine value. Traders in currencies are, in fact, sensitive to central bank policy, trade balance data, and political news. Insights into these basics have helped traders prepare for stronger trends and keep out of weak trades or investments with deteriorating macro pictures.
Combining Both Approaches Effectively
The best traders are usually both “fundamentally” driven (related to underlying cash flows) in deciding what to trade and “technically” driven (based on historical price and volume behavior) in deciding when to trade it. For example, you may use fundamental analysis to find an undervalued stock with good growth potential, and then use technical analysis to time your entry when the stock breaks out over some significant resistance level. This hybrid strategy exploits the advantages of the two approaches and compensates for their respective limitations.
If you are searching for the tools and platforms that draw both these analysis together, a wemastertrade review will allow you to decide whether the tool (that your platform offers) serves your strategy well and provides the data analysis and the community and the ease of use you are looking for.
Choosing Your Primary Approach
Your own trading approach, time frame and personality determine which methods you should place more focus on. Day traders and scalpers tend to utilize technical analysis more than fundamental analysis since time is of the essence during their trading combined with the need for valid, accurate timing. Mature investors tend to love fundamental analysis for finding quality securities for the right price. For example, swing traders may use fundamental analysis for determining which asset to trade and technical analysis for timing its entry and exit.
Wrapping Up
Combining technical and fundamental analysis gives you aþ more complete view of how these factors influence market action. Begin by getting really good at the fundamentals of one and beginning to add pieces from the other as you get more experience. Bear in mind that no analysis is completely perfect – trading is a game of probability where getting the odds in your favor over a series of trades is the only way to guarantee consistent results.
