When it comes to taking the first steps in trading, amateur traders should note that one of the important points worth learning is that there are 2 different types of analysis: technical and fundamental. And each of them has its own pros and cons. To understand the market better and to predict the future direction of price changes, it’s good to combine these 2 analyses. As understanding specific aspects of each analysis can help traders to combine them better, we’ll take a look at each analysis in the following paragraphs.
Technical analysis is based on the analysis of the price chart. In order to figure out and estimate the current market conditions, analysts put past price performance to use. Traders also manage to find out the optimum entry and exit points (when opening and closing the deal is possible) by using support and resistance levels with technical analysis. The technical analysis can also provide a collection of practical data and help the traders to anticipate the direction of the next trend. On the other hand, there’s no denying the fact that this type of analysis can barely disclose the price in the long run. For the price chart can’t specify thorough information on the future performance of an asset.
However, fundamental analysis studies the real-life events that can impact the asset price. A release of collective news can cause a huge price swing. Good news like striking financial performance, growth prospects can positively affect the real value of a company. Dissimilarly, imperfect financial performance, negative press coverage, and in general what we call “bad news” negatively impact the value and reduces the market price, as well. Similar principles can be applied to commodities, currencies, ETFs, and all exchange-traded credits.
Although it’s not always easy to combine the analyses, it’s of great importance. Monitoring the recent trade volume and activity of others can be of great help to traders. Moreover, volume indicators can be used by traders to check the power of the current trend. Totally, when a trade acquires strength, the volume goes up. With that being said, it can be a sign of approaching trade reversal when the volume goes down. As actions of each trader can determine the market behavior, what other people think about the assets must be of great importance to you as a trader.
Since the market repeats itself over time, you can get a competitive advantage over other traders simply by knowing the patterns. In order to detect the patterns, you need to follow the connection between fundamental events and signals.
In short, both of the analyses should be of great importance to you. For the fact that one of them is focused on the past performance of the market and the other focuses on future events. However, traders must not fail to observe that no matter what analysis they use, they can’t always correctly estimate the future asset price.