Technical or fundamental analysis Which one should you choose

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Fundamental vs Technical. What Analysis Type to Choose?

A lot of traders believe in either technical or fundamental analysis. The adherents of the former state that the market is a perfect validating machine and all factors (that can affect the asset price and are widely known) are by default reflected in the price chart. It can, therefore, be used on its own in the decision-making process. Those who believe in fundamental analysis pay more attention to the intrinsic value of the asset, which, according to them, is not always taken into account by the market. In today’s article we will take a closer look at both types of analysis and decide which one to choose — if there is at all the need to pick one.

Fundamental Analysis

Fundamental analysis is a method of an asset assessment based on the concept of intrinsic value . The latter is the ‘true’ value of an underlying asset, that is not always reflected in its market price. Indeed, when we say that a stock is trading at a premium/with a discount, we mean that its market price is not identical to its intrinsic value. Economic, financial and political factors are taken into account when evaluating a security from a fundamental viewpoint. The end goal of this type of analysis is to come up with a target price, that can then be compared to the market price. Should the intrinsic price be lower than the current price, it is wise to consider selling the asset. Should the opposite hold true, it is wise to buy it.

Although this method is usually applied to stocks, it can actually be used for almost any asset. In order to evaluate a currency pair (traded on the Forex market), the trader may want to look at the key interest rate, the rate of inflation and the GDP growth rate. All of the above can heavily influence the exchange rate. For stocks, earnings, revenue and their derivatives play the most noticeable role. Warren Buffett, dubbed the Oracle of Omaha, is an adherent of this exact approach.

Here is an example of fundamental analysis and how it works. When Facebook released one of the earnings report back in the days, the market was expecting a 43% increase in earnings, but the company demonstrated only a 42% increase. That and decelerating user growth have resulted in a 20% price decrease of its stock price. Quite a hit! It is worth saying that a suchlike price plunge could have hardly been predicted with the help of technical analysis.

Don’t forget that as not all fundamental factors are quantitative, there can be two opposing interpretations of the same set of readings.

Technical Analysis

Technical analysis, in turn, is based on the use of historical market data, namely trading volume and price . This type of analysis is not particularly interested in intrinsic value and its practical applications. Technical analysts believe that the past performance of the asset, displayed on the price chart, is a better indication of its future behavior than the intrinsic value. This school of thought postulates that patterns can be observed in the behavior of any asset and, most importantly, they tend to repeat themselves over time. Technical analysts, therefore, try to predict the said patterns and capitalize on them.

Since all the important information is openly available on the market (anything else would qualify as insider trading, which is illegal), the price is believed to always reflect “the sum total knowledge of all market participants.”

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Every asset, traded on the market, is subject to the basic laws of supply and demand. Low supply and high demand push the asset price higher. Conversely, high supply and low demand push it lower. Technical analysts track the discrepancies between the two in order to predict the future performance of the asset. Over the years, a huge variety of technical analysis indicators were created. Some of them help determine the prevailing trend. The other excel at pinpointing reversals. There is no single best indicator. Each of them has unique features and helps to solve a particular problem.

It can be said that while fundamental analysis pays off on longer time frames, technical analysis is predominantly used by day traders and traders working on shorter time frames.

What to choose?

You may believe that there is one type of analysis that will better suit your trading style, and you may be right. However, as there is no one-size-fits-all technical indicators, there is no right or wrong method to predict future price fluctuations . Better think of technical and fundamental analysis techniques as two sides of the same coin that perfectly complement each other. According to Michael Marcus, an iconic trader who has multiplied his account 2,500-fold over the course of ten years, fundamental and technical analysis should both confirm your prediction for a deal to close in the green. It doesn’t mean that this combination will never fail. Still, the chances for a positive outcome are much higher this way.

*I nformation regarding past performance is not a reliable indicator of future performance.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.

GENERAL RISK WARNING

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
87% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Technical or fundamental analysis: Which one should you choose?

There are loads of strategies for the trading binary options, forex or cryptocurrencies that can be grouped into two categories: fundamental a technical.

Which of them is more efficient?

Is it possible to use technical analysis without using fundaments? What do the two terms “technical” and “fundamental” mean? If you read our today’s article, you will get answers not only to these questions.

Technical analysis

We all know what technical analysis means. Technical analysis includes trend lines, formations, indicators, oscillators etc. One of the premises the technical approach is based on is that history repeats itself. Therefore, if you find out that X was followed by Y in the past, it is likely that the same or similar pattern will repeat in the future.

If you are a trader using graphs, trend lines, pin bars, indicators, Fibonacci lines etc. you are regarded to as a technical trader. In terms of binary options, these strategies assume that the specific formulas and monitoring techniques boost our chances to forecast in which direction the trend is going to move. These strategies are used by the vast majority of binary options traders.

Fundamental analysis

Unlike technical analyst, the fundamental analyst explores macroeconomic data. If for example, you want to trade EUR/USD you should be aware of all relevant information concerning the economies of both the EU and the USA i.e. their payment balances (export and import), central bank’s exchange rates, unemployment rate, real estate market, political situation etc. Based on the data, you will then determine the final rate and speculate over whether it is too high or too low.

This type of strategy can be efficiently applied for trading shares, as well as cryptocurrencies. See Fundamental analysis part 7.

Which one to choose

If you ask which of the two analyses is better my question is “both, depending on the situation”. They both have some specific features. The technical analysis works better in the short run. Hence, if you are a daily trader the technical analysis should help you more. On the contrary, the fundamental analysis performs better in the long run.

All depends on the type of trader or, in other words, the way you want to trade.

As a forex trader you should not rely on one analysis only. Trading technically doesn’t mean ignoring fundamental factors. If you are a technical trader and want to be informed of the fundamental aspects I recommend that you watch forexfactory.com, offering all important macroeconomic news. During periods of increased volatility your technical analysis might not show you the correct picture.

The minimum each trader should know of the technical analysis is: Never trade when important (red) news are being published. The same applies vice versa. As a fundamental analyst and trader you should assess the situation but it is not reasonable to trade against a strong technical pattern. You should know at least the essentials and be cautious, especially when it comes to premature highs or lows, strong support or resistance levels etc.

It’s not either or. Technical or fundamental. While the technical analysis works better for shorter periods, the fundamental analysis is useful for longer periods of time. Keeping this in mind, I recommend that you combine both. If you want to go in one way only you can do so but as a good forex trader never forget that there is a second side of the coin, respect each other and don’t step into each other’s zone.

You can be a traditional user exchanging money such as USD for cryptocurrency at a certain rate in the same way as you do when exchanging USD for euro before your holiday.

You can leave your crypto (litecoin, bitcoin or any…). in your wallet or at an exchange. Later on, once the value has increased take the crypto and convert it back into USD. Ideally, you will get a multiple of your initial investment. If you had retained all your money in bitcoins from 1 January 2020 to 31 December 2020, you would have earned around 1300 %, i.e. 13 times as much as you had at the beginning of the year

Or, you can speculate on the exchange rate of cryptocurrencies to earn money in the short run in the same way as on Forex. You can do this for example with or IQ Option.

Leverage trading

With the traditional holding of crypto, you cannot use leverage for trading. There is nothing that complicated about leverage trading as it may appear at first sight. Leverage trading offers you to multiply your initial investment. If you have on your trading account, let’s say USD 10 000 and use a leverage of 1:10 you can open trades as if you had on the account USD 100 000. Your earnings will potentially be ten times bigger. The bad news worth mentioning is that the same principle also applies to the opposite direction when you lose.

Author

More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn’t very successfull with dropshipping on Amazon and other ways of making money online, and I’d only earn a few hundreds of dollars in years. But then binary options caught my attention with it’s simplicity. Now I’m glad it did because it really is worth it. More posts by this author

Fundamental or Technical Analysis – Which one should you use?

Often times, beginners to stock market analysis wonder which technique is more suitable for trading/investing. This article is a guide for choosing between one or both. To understand which technique you should chose, you need to understand what each one is all about first.

Fundamental Analysis is the analysis of all factors that can affect a stock’s value, including macroeconomic factors (like the overall economy and industry conditions) and company-specific factors (like financial condition and management). It involves studying the publicly announced financial results and financial statements like the balance sheet and the income statement to understand the financial health of the company and predict the intrinsic value based on which the decision to buy or sell can be made.

On the other hand, Technical Analysis is the study of the price and volume history of a stock to predict future stock prices. Pure Technical Analysts believe that whatever fundamental factors are there are already reflected in the stock price and volume.

When deciding between the two, one must remember one big advantage that Technical Analysis has, and that is that Technicals always lead Fundamentals. What this means is that bad news will reflect in the stock price earlier than it shows up in the Fundamentals. e.g. when a CEO or CFO is to resign or fired, you’ll start to see the stock go down even before the announcement. Maybe one reason for this is because the prices go up and down because of the collective masses and it is natural for some rumors to creep into the market causing markets to move even before the Fundamentals news is announced.

Both Fundamental and Technical Analysis have their respective advantages though and which one to use or give more weightage to, also depends on the trading horizon you have. Generally traders can be classified into 3 types:

  1. Long-term – with a holding period of 6+ months.
  2. Short-term – with a holding period of a few days to 3 weeks.
  3. Intraday – those who buy and sell on the same day.

Fundamentals are obviously not too useful for intraday traders, but if you are a long-term trader, they are indispensable as you want to be holding companies that are fundamentally sound. With so many companies out there, Fundamental criteria can also help you filter the stocks for short-term trading to maximize your short-term profits.

A lot of long-term investors believe that they don’t need to look at Technical Analysis at all. But, we feel a little different. Unless you are Warren Buffett and have plenty of capital that you don’t care about what price you buy a stock, most of us have limited capital and hence want to deploy it properly even if we are long-term investors. In such situations, Technical Analysis becomes the tool to help you in timing, i.e., deciding when to buy and when to sell.

To summarize then, Fundamental Analysis is a great technique for narrowing down the list of stocks that you want to trade (especially if you are a short-term or long-term investor) and Technical Analysis is a great technique for deciding when to buy and sell the stocks in your watchlist. So next time a pure Technical Analyst or Fundamental Analyst tells you that you need to only choose one – you can give him the correct answer!

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