Fundamental versus Technical Analysis

AAEAAQAAAAAAAAObAAAAJDJlODBiZjg4LTA3ZDktNDdjYy04OGI5LWQ3MjEzYjQyMDIxNgTrading systems are most of the time based on technical analysis in a computerized automatic way, so in this article we will only discuss fundamental analysis versus technical analysis.

When it comes to trading financial assets, there are three methods to forecast prices:

  •     fundamental analysis
  •     technical analysis
  •     trading systems

Fundamental analysis

Fundamental analysis means to study the economic variables and news affecting the price of an asset. For example if the European Union decides to take legal actions against Google due to unfair practice, this is a news and it affects Google options. If a study comes and says that Google domination of the growing mobile search market is increasing, this is another news but bullish this time. Or if Google’s earnings are slowing down, this is financial data related to the company and this is part of fundamental analysis.

In binary options you can trade 4 asset classes and the type of fundamental data to consider differs depending on which asset you are looking at.

Stocks: Stock prices depend mostly on the company specific data as explained above. Also sector info matters, so any new information related to the Internet, online advertisement, mobile sales,… will affect Google. Third the entire stock market will affect Google too (see next paragraph).

Indices: if you trade stock or indices, then the fundamental data moving them are data related to the particular economy they belong. If you are trading the Nikkei for example, ie the Japanese index, then news such as how strong the Yen is (as this impacts exports) or how strong/weak the economy is, will influence market movements.

Currencies: When you trade currencies the fundamental data that counts is very specific to each currency pair. But as all currencies are traded versus the dollar, the first thing to look at within fundamental data is what is affecting the dollar today. Data such as US interest rates, inflation forecast, budget deficit, Fed minutes,… will make the dollar stronger or weaker. Then each currency has its own local data, so if interest rates go up in the UK, this should have a positive effect on the GBP rate.

Commodities: Commodities also have their unique set of fundamental data. Taking crude oil for example, supply and demand from the main producers and consuming countries are important factors on top of the purely macroeconomic data. Each commodity has specific data to look at in particular mining or agricultural conditions.

Technical Analysis

Unlike fundamental analysis where each asset has its specific type of data to follow, for technical analysis you can apply the same methods for all assets in your portfolio.

Technical analysis means to use price data only to make your forecast, as well as similar type of data. So for example if you use a 50 days moving average to predict trends, then this is based on price only so this is technical analysis.

Some readers may wonder why use such meaningless data when you can use fundamental data which is exogenous to the price, in other words separate from price and as such it should be more meaningful. Proponents of technical analysis believe that all fundamental data is already included in the price. But by looking at charts and early price action, they believe they can uncover emerging trends.

There are numerous methods in technical analysis, depending on what indicator you use. To name a few moving averages, range and range breakouts, Bollinger bands, formations like double tops, and more. More advanced technical decision methods can be integrated into more complex trading systems.

Often it is a question of personality between using technical analysis against fundamental analysis, as some traders are more keen on using one method versus the other. Overall both methods matter so it is recommended to study and understand both before you get started with binary options trading.

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