Technical or fundamental analysis Which one should you choose

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Technical or Fundamental-which one to choose?

After reading a post by a technical analyst calling our attention to the daily and monthly charts of EUR USD being over bought, with a bearish reversal pending, a fundamental analyst pointed out the current fundamental situation of the USD like cutting of interest rates, etc which indicates the fall of USD.

I found both analysis very useful and reasonable, but unfortunately contradictory, with one envisaging positive direction of USD but the other negative.

As a new and inexperienced trader, I now want to know the most reliable analysis, or how can we merge these two contrasting opinions?

  • Post # 2
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  • Feb 8, 2008 5:40am Feb 8, 2008 5:40am
  • Post # 3
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  • Feb 8, 2008 6:47am Feb 8, 2008 6:47am

That’s exactly why EURUSD is ranging.

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  • Feb 8, 2008 6:55am Feb 8, 2008 6:55am

Traders buy and sell based on their opinions and needs. Their actions are recorded on the price charts.
Some have traded using TA, some with fundamentals and some with both.
The results of the two are clear to see as price action.

Sign up for the free info at elliottwave international, they will will provide enough evidence to show that it is not fundamentals alone that moves the charts.

My viewpoint is the biggest money in the market belongs to businesses, who use employees to trade. These employees do not want to make mistakes. Having a fundamental reason to back up their trading decision makes it harder for them to be sacked if they lose money. When a trade goes wrong, they can b/s their manager that the trade made sense based on the fundamentals. In turn the manager will b/s their superior with the same waffle. The result is a group hug and it’s on to the next trade.

In day trading, I believe it is TA that rules, but you MUST BE AWARE of fundamental NEWS RELEASE TIMES especially if they are coded red.
Keep you trading simple. If you need lots of indcators to help you understand the price action, that is ok. A some point in the future you may decide to remove some of them.

  • Post # 5
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  • Last Post : Feb 8, 2008 7:36am Feb 8, 2008 7:36am

A. Overbought is a symptom of a trend.

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B. Whenever a trend has persisted for some time, there will always be those who start calling for a reversal. It’s human nature, just as rooting against the Pats came naturally for so many people this year. It’s an intrinsic, twisted part of our nature that we don’t like winners after a certain amount of time.

C. There is no one reliable source or method of information. If there were, then someone would own you, me, and the world.

D. Don’t believe anything you read, including the preceding statement.

What is the difference between technical and fundamental analysis?

This article explains the difference between fundamental and technical analysis so you can pick a form of analysis that is best suited to your trading personality.

Fundamental analysis

Fundamental analysis can be used to evaluate a number of trading instruments, such as shares, indices, currencies and commodities. Some traders will want to weigh up economic factors such as a country’s GDP, unemployment levels, company profitability and the health of a sector before taking a decision to buy or sell. This is all fundamental data.

In shares trading for instance, fundamental analysis can be used to evaluate factors such as the company’s performance, news reports, conditions in the sector and more. Let’s take for example a trader who uses fundamental analysis as part of his trading strategy. He is trying to determine where shares for Airline XYZ could be headed in the coming days, weeks or months. To do this, he would have to take into account factors such as the cost of oil, tourism numbers and even political unrest that could potentially impact travel within the sectors in which the airline operates. This is because rising oil costs would make flying more expensive for airlines, while political instability would discourage tourism, ultimately impacting profitability and the company’s share price.

Technical analysis

People who just look at price charts are called technical analysts. They argue that everything you need to know about a particular asset, be it a share, forex pair or commodity, is already being reflected in the price. Technical analysts plan their trades and investments based on price trends, chart patterns such as head and shoulders, and more mathematical chart indicators such as moving averages.

For very short-term trading, it’s fair to say that most people lean towards using charts. One obvious reason for this is that many traders are looking for relatively small movements and, although we are probably now exposed to more newsflow than ever before, there just isn’t enough major news that breaks all day long to continuously affects the markets.

Choosing between technical and fundamental analysis

As a new trader, which path should you follow and what approach works best? The honest answer is both! It is possible to make money using either technical or fundamental analysis, but maybe there is a happy middle ground where a blended style could give the best outcome.

It certainly pays to be aware when major fundamental news is being released. At the very least, even the most committed chart traders should know when the various central banks around the world are due to announce interest rate or other policy decisions. This, coupled with the release of major data such as unemployment numbers, can really move the markets. Trading with a head-in-the-sand approach around these releases can be expensive, as market volatility often picks up.

If there is a major change to what everyone was expecting, for example if interest rates go up or unemployment is much higher than expected, it can mean that a few words make chart patterns take a very different direction. But traders can use charts following the announcement to see if sentiment really is changing, or whether the burst of volatility was something of a five-minute wonder.

If a trend on the chart resumes after some unexpected news, then the market clearly does not think the news was actually that important. The person with one eye on the charts could well have the advantage here over those who just watch the news and are convinced that the market should be reacting differently – often a dangerous approach.

Risk management

Risk management is another area where a combination of the technical and fundamental approach could work. Economic news may tell you that the market’s attitude towards a certain financial asset is changing but it does not necessarily tell you when your view on the market is wrong. Using traditional chart points such as support and trend, for example, the fundamentally-biased trader can manage the risk on his revised market view if that proves ultimately to be incorrect.

The blended approach can also help confirm trends. If, for example, the majority of people are expecting an interest rate rise, but it doesn’t come, then the currency of that particular country would normally slip back. If it continues to rise then it can be a sign that there are other factors at play here and the interest rate element is not that important. How the market reacts to fundamental news can still be used by the technical trader.

It is maybe not too surprising then that there is no definitive answer to this, and the argument between the fundamental and technical approach is destined to rage on.

As ever there is no silver bullet that will ensure we are right all the time. But there are plenty of different and profitable trading strategies out there – be they purely technical, fundamental or a mix of the two. It’s all about finding a methodology that fits with your own particular trading personality.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

Fundamental vs Technical Analysis: Which is Better at Predicting Market Prices?

Fundamentals vs Technicals:

  • Some market forecasters use technical analysis. Others prefer to look at fundamental factors such as economics, geopolitics and sentiment. Some combine both approaches.
  • So which technique works better and can the other be safely ignored?

Fundamental vs Technical Analysis: Where to Start

Market analysts fall into one of three camps when attempting to forecast future price movements:

  1. T hey use technical analysis , which involves reading charts and interpreting price movements.
  2. They use fundamental analysis, look ing at factors such as economic data, interest rates, political developments and sentiment , or
  3. T hey combine the two.

For the beginner, technical analysis is often attractive because superficially it provides easy answers. You just look at a chart, follow some rules, and it tells you the levels at which to buy and sell . The problem is that there are many different approaches, ranging from the relatively straightforward to the very complicated.

At its simplest, all that is necessary is to draw some trendlines on a chart and wait for them to break, make a note of previous highs and lows, look out for some basic patterns and perhaps add in some moving averages and a momentum indicator such as the RSI: the relative strength index .

Where You Might End Up Using Technical Analysis

The problem is that from there on there are many different approaches. One book I studied before passing my exams to become a Member of the Society of Technical Analysts, Technical Analysis of the Financial Markets by John J. Murphy, is 576 pages long and is packed with alternative forecasting methods ranging from Dow theory via Gann and Fibonacci fan lines to Bollinger bands and Elliott Wave.

Many experienced technical analysts – including colleagues here at DailyFX – use one or more of these techniques but there is certainly no consensus about their relative value. Indeed, some analysts argue that a simple approach is the best simply because professional traders tend to use the same basic ideas that are therefore self-fulfilling (a charge that many serious technical analysts would deny vehemently).

What the Fundamental Analysts Say

For economists and others who look at the fundamental factors affecting asset prices, the technical approach outlined above is akin to black magic. The only way to predict the markets, they would say, is to analyze the economic data , listen to the policymakers, follow political developments and maybe glance at flows data, sentiment gauges and positioning.

The problem they have is that this might well help to predict the direction of stock, commodity, bond and currency prices but it has little to say about timing, targets or entry and exit points. Working as senior international economist at a London-based consultancy, I became increasingly aware that market forecasting using economics is even more difficult than predicting economic data.

So Why Not Combine the Two?

This seems to me to be the most sensible approach and here is something I wrote about EURUSD combining the two approaches . Below is the chart that I used at the time:

EURUSD Price Chart, Daily Timeframe (July 16, 2020 – January 10, 2020)

Chart by IG (You can click on it for a larger image)

However, there is a problem – the two approaches can give opposite answers. In economics, for example, there is a concept known as “reversion to mean”, which argues that there is a strong tendency in the financial markets for a price to move back to some kind of “correct” value, however that is defined. When, for instance, a stock price moves strongly higher, technical analysts would probably suggest that the trend will continue and urge their customers to buy more.

This brings out the economists warning that the price has already been chased too high and of a reversion to mean, that being a measure like the CAPE, or cyclically- adjusted price-to-earnings ratio, developed by Yale economist Robert Shiller. No, reply the technical analysts: t raders should expect the price to trade between the support and resistance trendlines until it breaks out beyond one of the two levels .

Fundamentals vs Technicals Conclusion

There is no right or wrong answer to this debate but it seems dubious to me for technical analysts to argue that everything you need to know is in the price. You only have to look at the very sharp movement in the Swiss Franc after the Swiss authorities broke its link to the Euro , or the drop in the Pound after the British voted unexpectedly for Brexit , to see that this is not the case.

Conversely, fundamental analysis has little to say about animal spirits, or trader psychology , which is arguably an important market driver. Looking at both is therefore the safest option – and potentially the most likely to succeed.

More to read:

Resources to help you trade the forex markets:

Whether you are a new or an experienced trader, at DailyFX we have many resources to help you:

  • A nalytical and educational webinars hosted several times per day ,
  • T rading guides to help you improve your trading performance ,
  • A guide specifically for those who are new to forex ,
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— Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at [email protected] or on Twitter @MartinSEssex

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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