Combining Fundamental and Technical Analysis: Many novice traders wonder which one to start with, which strategy to choose and which one to pay attention to when they start learning about the market. One of the first things traders learn is that there are two methods of analysis, fundamental and technical.
Each has its advantages and combining them or using elements from each of them could help traders better understand the market and decide in which direction the price is heading. Let’s look at the advantages of each of the methods and see if the mixture of the two can be beneficial.
Technical analysis allows you to evaluate the chart and develop your strategy according to past price movements. Using support and resistance levels along with trend indicators and oscillators helps traders find market entry points based on past chart behavior.
Such an analysis can provide the trader with a lot of useful information and help make a prediction about the direction of the price, however, it does not tell us what will happen to the price in the long term, as the chart cannot provide information in the longer term.
Fundamental analysis, on the other hand, focuses on studying the economic situation and how future press releases will affect a particular currency or stock. Major publications also bring volatility to the market and traders can plan their strategy by using the estimated news reaction as the core of their approach or by basing the strategy on the predictable «reaction to reaction» reaction of the press release.
Combining Fundamental and Technical analysis can be useful in a number of ways. It can be beneficial to check recently traded volume and see the activity of other traders. A trader can use volume indicators to find out if there is a coming trend, the volume tends to increase when a trend gains momentum.
When the volume decreases, it may indicate that there could be a next reversal of the price trend. In general, it can be very useful to observe what other traders think of the asset, as this strongly influences price movement.
A trader who uses Fundamental analysis as his main tool may also incorporate indicators to help track price behavior each time a certain type of news has been published, it may be useful to uncover patterns in the market’s response to a certain event. As market behavior tends to repeat quite frequently, this could be an opportunity to enter into an agreement.
To sum up, it is safe to say that the two methods of analysis can complement each other and allow a good commercial approach. One relies heavily on past market activity; the other focuses on future events. Both have their goodness and the realization elements of each can be a good strategy for an inexperienced investor.