Technical and Fundamental Tools

Fundamental and technical analysis are two major schools of thought when it comes to studying the markets to identify potential trading opportunities. While seen as two opposite ends of the spectrum, there are merits to both types of analyses and they can be effectively combined to identify potential trade entry and exit points.

Fundamental Analysis

Fundamental analysis is a method of evaluating a market through macro-data and news. Releases like the latest Federal Reserve Interest Rate Decision and the NFP report, are taken into consideration when it comes to evaluating the value of the U.S. dollar for example. When it comes to stocks, a fundamental analyst would review the company’s latest earnings reports, expenses, liabilities, any changes in its management structure, the popularity of the company’s latest products and any major news surrounding the company or brand, to evaluate its current and possible future state.

In a nutshell, fundamental analysts study everything from the overall economy and industry conditions to the financial strength and management of individual companies to inform their trades.

Technical Analysis

Technical analysis uses chart analysis with the study of different patterns formed by price movements and candlesticks to determine where the market is moving. The movement of price is tracked on charts with various indicators or patterns to help determine where price is going to move next. Technical analysis uses the visual representation of price to help illustrate where price is and in which direction it may move in the future.

For example, if the average price of a share over a short time period of 50 days, crosses above the moving average of a share price for a longer time period of 200 days, technical analysts might consider that as a buy signal. Likewise, if a stock’s 50-day moving average price falls below its 200-day moving average, technical analysts might consider that as a sell signal.

It is important to note that the focus here is on the actual price of the asset, not the financial health of the company or industry or economy. When using technical analysis, you are assuming all the relevant information is already in the asset’s pricing history.

Their difference and combination

Fundamental analysis focuses on “fundamentals” such as earnings and performance, while technical analysis employs charts of past tends, statistical methods and rules based on price and volume to “predict” future market activity.

While each form of analysis relies on different data and different assumptions, since they are both referencing the same market, the information provided by technical and fundamental tools can be used in tandem to build a more complete analysis of the market you want to trade.

Fundamental’s key factors

When it comes to studying the fundamentals, there is a set of major economic indicators watched by traders to stay informed on macroeconomic events that may impact markets’ volatility. Economic data tends to be one of the most important catalysts for short-term movements in any market, but this is particularly true in the currency market, which responds to news from around the world.

These include inflation reports, Gross Domestic Product (GDP) data, Employment Reports, Consumer and Producer Price Indices and the nominal or base interest rates set by an economy’s central bank which impact their respective currencies. When it comes to stocks, traders will keep an eye on the latest earning reports, company statements and major product rollouts.

Risks

While there are no inherent risks to simply studying the markets using technical and fundamental tools, there are direct risks associated with trading CFDs. It should be noted that no matter how you choose to inform your market analysis and trading, no amount of analysis can guarantee how the markets will move. While studying the markets and being an informed trader is immensely important, it can be tempting to think that because you have studied the fundamentals and used technical indicators to determine the possible future course of the markets, your position is “guaranteed”, but that is never the case. Markets can be volatile and hard to predict, which means that your speculations, no matter how well-informed they be, are never guaranteed. There is always a risk of losing your invested capital and you should carefully consider your risk exposure before placing any trade.