This is a guide to the beginner or experienced traders who are looking to start their investing journey or looking to enhance their trading skills.
What is Fundamental Analysis:
Fundamental analysis is based on decomposing the factors including external and market events that may influence the price of an underlying asset. This form of analysis is a good starting point for those who believe in valuing assets based on their intrinsic value.
The building blocks for good fundamental analysis come from the following:
1) The source and timing of the information
2) The lasting time effect of the information
Advantage:
Fundamental analysis allows trader to formulate rational and longer-term views. Traders are less likely to carry personal biases. Strategies could include mean reversion and setting wider trading parameters.
Disadvantage:
The process of collecting and analyzing relevant market information could be time-consuming, and whether the market has already priced in the information is hard to tell. That longer-term based strategy may require more time and patience to eventuate. Moreover, market shocks from economic, political, or legislative changes may present an unpredictable risk to a fundamentally based view.
What is Technical Analysis:
Technical analysis on the other hand is more suitable for trade execution. It an art of spotting and examining price patterns based on historical price data and use those patterns to project future price movements.
The building blocks for good technical analysis come from the following:
1) Reliable historic data
2) Backtesting on technical trading strategies
Advantages:
The prevalent use of certain indicators to identify support and resistance will see buys and sellers congregate at certain price levels. This ultimately increases the effectiveness of the indicators as people hold similar views that will eventually see the patterns repeat. The ability to develop unique trading indicators allow trader to capitalize on better entry and exit points in a market.
Disadvantages:
Prices in the market are driven by the current market flow, not by the historical patterns. A sudden flow in the market can drive the prices either way regardless of what the price pattern says.
The key takeaways here are to utilize these analyses to your advantage, and never rely solely on one factor or indicator. Beware the limitations to your method and adjust strategies to adapt to the changing market environment.
Read more on forex trading for beginners.
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