Technical and fundamental Analysis in Trading

Posted by on Dec 22, 2012

By Fabiano Trevisiol


TECHNICAL AND FUNDAMENTAL ANALYSIS

 

technical and fundamental analysis

In this article we will see the main differences between technical analysis and fundamental analysis, which are two completely different approaches to trading, and it is curious how the non-directional method is so revolutionary that it hardly placed in one of these two types of trading, which normally are used to classify a strategy or a type of operation. non-directional forex strategy is simply mathematics and then goes completely different from conventional trading. In this article I would, however, like to explain the differences between technical analysis and fundamental analysis. The best way to understand the differences I think define them one at a time, so the differences will be easy to understand.

 

Trading with technical analysis

Technical analysis is a way to predict the future performance of a financial instrument by examining the motions that the price of this instrument has had in the past. When you analyze the price into the past to predict the future trends using charts, the most used are the Japanese candlestick charts, or “candlestick” or “bars”, technical analysis applies to trading on almost all financial instruments, equities, forex, futures, indices, precious metals and is valid any time frame. The time frame is the reference period of candles on the chart. For example on a time frame of 5 minutes, each candlestick will express a duration of 5 minutes. There are charts from 1 minute time frame, up to 1 month. It for granted the fact that the greater the time frame and the higher the reliability chart analysis, in particular most of the traders who use technical analysis is trading from chart 4 hours up, preferring the daily, for a variety of reasons. In addition to reliability, also because this way you can trade with larger positions, even by days and weeks and psychologically easier to manage because they don’t require hours and hours attached to the computer screen. This truly is a fact, because there are people working, intraday open and close all positions within the same day, and which fail to sleep at night knowing that you have an open position on the platform.

Assumptions of technical analysis
  • The price discounts everything
  • The price movements are not always random
  • What is more important than why
 

The price discounts everything

This theory assumes that the price includes in itself everything that happens in the market including news and information, rumors, statements, everything that affects the market is enclosed and discoverable within the movement of the price. Another assumption is that price movements are not always random.

Of course, this kind of analysis is not intended to be accurate at 100%, and even to 90%. Simply aims to be right most of the time. According to the market conditions, which may be more or less favourable to this type of study can graphics get a success rate in certain periods of less than 50% in others much faster, on average the 60% succeed or 65 percent of the time, whereas take profit and stop loss at the same distance, it is already a good result. There are traders who base their operation on the 50 and 50, the fact that the market tends to be casual most of the time and only sometimes predictable, this means entering into sale or purchase at random, on average over a period of many months or years we’ll have a success rate of 50%, adding some technical analysis trader are content “and campanus” on a trade or two in extra profit compared to losing positions, per month. For example, entered a market 20 times per month, are content to 12 profit-and-8 loss. Percentage is 60% positive operations and this is definably a great success. Who uses technical analysis then is aware that this often mistaken, takes each defeat and expected profits, knowing that the averages are met in the long-term and in the meantime you can also present as a negative or positive sequences more or less long. This concept is easy to understand if you try to throw a coin into the air 100 times. On the average jumps 100 won’t be far from 48 times and 52 cross head, or 50 and 50, 49 and 51, or however you will be amazed at how many runs of heads or tails in a row can happen, even 5 consecutive head, or 8 consecutive tail. This shows (seeing is believing) that the average of 50 and 50, 60 and 40 or (in the case of technical analysis to our advantage-60% 40% payout losses) to be true in the long run to hundreds and hundreds of trades and also explains the difficulties intrinsic psychological trading with technical analysis, in having to be ready for negative prolonged sequences problem where this non-directional method is creaking, and come in more detail what is and how you can define technical analysis.

 

What is more important than why

Who uses technical analysis focuses especially on 2 fundamental questions:

 

1-shows the current price?

2-what is the current price history

 

The price at the end is simply the result of the battle between those who buy (the Bulls) and who sells (bears) and then the price in chart displays all the information you need. While traders using fundamental analysis, the question I get is “why?” or “why we have the current quotation?”

In my opinion they are both important, fondamental analysis we will see better at the end of this article, actually were I am a fan of technical analysis, I know more of the latter, but I admit that lately even fundamental analysis began to fascinate me, actually I think as it happens most of the time, the reality is in the Middle, it should be noted both the technical analysis that the fundamental and mediate between both.

 

Base assessments of technical analysis. 

The identification of trends.

The trend is the general direction of the price, in most cases the price follows a direction, which can be up or down, you can locate on the graph using moving averages, or watching the chart clean looking as are the maximums and minimums of candles. Maximum descending generally indicate a down trend, while increasing minimums indicate an uptrend.

 

uptrend trading

 

It is important for a technical trader to identify the trends, there are different types, depending on the period.
  • the primary trend or long, ranging from 6 months to one to 3 years
  • the secondary trend or average, ranging from 3 weeks to 3 months
  • the minor trend or short, that is less than 3 weeks.
 

These three types of trends are obviously includes one inside each other like Chinese boxes can also be opposed, for example, we may have a primary trend bearish and a minor bullish trend, which obviously will tend to fizzle out in favour of the primary trend, sooner or later reversed its direction, generally the longer trend is expressed by an extended period of time, most tend to dominate over the other and if opposites tend to fizzle out in favor of the trend above, in a kind of “normalization” effect.

PRIMARY TREND

 

primary trend

 

ANOTHER EXAMPLE OF THE PRIMARY TREND

primary trend

 

THE SECONDARY TREND 

secondary trend

 

MINOR TREND

minor trend

 

When there is a trend, the price rarely always follows the direction of the trend, but performs oscillations, he pauses, then explodes in trend, and then pause again.

 

These stages are defined as follows:

  • Accumulation
  • Rise
  • Distribution
  • Fall

 

Accumulation

 

In the first stage of accumulation, the price remains fairly stable and there is no accentuated movements in any direction, at this time traders with greater institutional capital are preparing for the next rise, buying slowly so as not to guess their intentions to small.

 

Rise

At one point the purchases will be stronger, because the increasingly small traders will move generally in response to good news.

 

Distribution

At this stage the price back into a period of stasis, major investors are closing their positions in profit and this generates a slow or stop.

 

fall

At this point there is a wave of sales which do not find counterparts and the price goes down with speed. Right now the market is composed of many sellers and few buyers, the price drops quickly and begins the next stage of accumulation, then starts another round.

 

 price trend steps

 

 

Technical analysis then uses to support their predictions on trends in prices,price action, indicators like moving averages which help to identify the trends, the types of  japanese candlestick and pattern and formations of signals such as  harami, hanging man e hammersupport and resistance, also known as  Key levels.

These treatments have already been placed in FOREX GUIDE, where you’ll find a lot of information, even about the difference between  trend and range and some tips on how to avoid the classic error of  newbie when trading forex.

Technical analysis also uses indicators, in addition to the already mentioned moving averages, there are hundreds of known indicators, the most famous are the stochastic, the ADX, ichimoku point, pivot, and so on and so forth. I am not an expert on indicators and therefore are not currently qualified to get into the details, certainly in future I will look into the topic, providing a timely ad hoc item which can give you more information about it.

 

The weaknesses of technical analysis

The weaknesses of technical analysis are basically 5

 

1-personal bias due to the discretion

2-technical analysis signals often occur in late

3 discretionary, the same graph can be interpreted differently depending on the person who analyzes it, because there are no mechanical rules and precise to the millimeter.

4-trend and increasingly aren’t any more key levels also at odds, it is not always clear the chart and this genre often stated differently from different traders.

5-psychological difficulties, often as mentioned earlier you can meet such negative sequences difficult to manage and control emotionally.

 

The method non-directional is exempt from all these 5 problems. It is one and the same for everyone, do not arrive late, do not need to bear the weight of the losses, is not free from fixed pegs but rigid interpretations, is free from emotions.

 

Fundamental Analysis

 

Fundamental analysis assumes that the market is from the graphic point of view very random and to have a successful trading need to follow market-mover, the economic calendar, the correlations (also used in technical analysis), in the case of forex attitudes and decisions by central banks and Governments, elections, while in other marketsthe development of the companies, their profits and losses, the demand and supply of products of a certain area of the market,.The first thing that scans in General a fundamental trader is the General State of economies, this is feasible by looking at the graphs of securities, for example the S & P500 index from a clear idea of how the market was and as found in the present moment.

 

The strength of fundamental analysis

Long term trends and therefore more reliable, Therefore this technique is usually used to operate on long term investments.


Forex Strategy projectIdentification of who is good in the market and those who suffer.

In the case of forex it speaks of States or regions, in the case of individual companies or groups of companies.

Knowledge of who is doing what in advance.

Work knowing the information that are in the subject of our trading, future plans, goals and projects, allows us to assess more precisely how the financial instrument will move in the future, because we will be able to assess if it is implementing projects and sensible, intelligent policies or potentially dangerous and bankruptcy proceedings, all this information is often possible to know in advance so you can anticipate the market, when with technical analysis is impossible.

 

The weaknesses of fundamental analysis

1-difficult to find genuine and unmanipulated news

2-difficult to piece together the various news, which according to sources can also be contrasted

3-there is always a significant part of discretion, and this makes this method as technical analysis also subject to extended drawdown periods.

 

Thank you for your attention, as always I hope I have been helpful, a good-hearted trading everyone!

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