There are two main methods used to evaluate tradable securities: fundamental analysis and technical analysis.
- Fundamental analysis involves an in-depth study of “the fundamentals” which include revenue, valuation, growth, financial statements and other macro and microeconomic information.
- Technical analysis takes a more mathematical look at the markets and helps traders speculate based on “the technicals.” These include price movement, volume, trend history, order flow as well as historical support and resistance levels.
Both fundamental and technical analysis are used by investors to assist with trading decisions. While the two approaches are vastly different, they both aim to provide insight and price forecasts for hard-to-predict markets.
Which Approach Fits Your Trading?
Deciding whether to incorporate technical or fundamental analysis into your trading methodology will depend on your particular trading style. Every trader approaches the markets differently, and ultimately this decision is up to the individual.
Fundamental Analysis Traders
Fundamental analysts tend to be rational-minded individuals who seek tangible data to base their trading ideas off of. Whether it is combing over income statements, company filings, balance sheets, unemployment numbers or interest rates, fundamental analysis requires researching the factors surrounding a security which can affect its value.
One of the most famous investors of the current era, Warren Buffet, applies a fundamental analysis methodology which has led to exceptional financial success. His approach involves carefully scrutinizing publicly available information about companies to uncover important information which the market has overlooked.
Although most commonly used in equities trading fundamental analysis of futures can also be performed.
Technical Analysis Traders
Traders who employ technical analysis are drawn to patterns and trends which can be viewed on a chart. Operating under the premise that history repeats itself, technical analysis traders seek these patterns, statistics and signals which could indicate a future price move. Technical analysis is better suited for traders who are comfortable reading charts, often times with moving averages, trend lines or other trading indicators plotted over price data to extrapolate a trading thesis.
Paul Tudor Jones, who grew a $300,000 hedge fund into $12 billion over the course of 30 years, uses a technical analysis approach. Jones incorporates Elliott Wave principles into his swing trading style which strategically selects market tops and bottoms.
Technical analysis lends itself to all asset types: stocks, futures, forex and options.
Combining the Two Approaches
Some traders use an approach which combines aspects of both fundamental and technical analysis in their trading. For example, a trader might use fundamentals to come up with a general trade idea and then use technical analysis to fine-tune entries and exits.
Additionally, some traders use both approaches separately, taking fundamental analysis into account for long-term trades and using solely technical analysis for short-term or day trades. Due to the complex nature of both approaches, there are a multitude of ways to interweave the two forms of analysis.
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