Many novice traders wonder what they should start with, which strategy to choose and what to pay attention to when they begin learning about the market. One of the first things traders learn is that two methods of analysis exist — fundamental and technical. Each one has its advantages and combining them together or using elements from each one of them might help traders understand the market better and decide which direction the price may head. Let’s look at the advantages of each of the methods and see if the blend of the two can be beneficial.
Technical analysis allows you to assess the chart and build your strategy according to the past price movement. Using support and resistance levels along with trend indicators and oscillators helps traders with finding the entry points in the market based on the previous behaviour of the chart. Such analysis may provide a trader with lots of useful information and help make a prediction about the price direction, however, it does not tell us what will happen with the price on the long run, as a chart cannot provide more long-term information.
Fundamental analysis, on the other hand, is focused around the study of the economic situation and the way future news releases will affect a certain currency or stock. Important releases also bring volatility to the market and traders may plan their strategy around that – using the estimated reaction to the news as the core to their approach or basing the strategy on the forecastable <reaction to the reaction> of the news release. The assessment of the news may help determine a more long-term behaviour of the asset price.
How to combine?
Combining Fundamental analysis with Technical analysis may be useful in several ways. It may be beneficial to check the recently traded volume and see the activity of other traders. A trader may use indicators of volume to find out if there is an upcoming trend — the volume tends to increase when a trend gains momentum. When the volume decreases, it may indicate that there might be a forthcoming reversal of the price direction. In general, it can be quite useful to see what other traders think of the asset as that strongly influences the movement of the price.
A trader who uses Fundamental analysis as their main tool may also incorporate indicators to help trace the behaviour of the price each time a certain type of news has been published — it may help discover patterns in the response of the market to a certain event. As the market behaviour quite often tends to repeat itself, this might be an opportunity for entering a deal.
To sum up, it is safe to say, that the two analysis methods can complement each other and allow for a good trading approach. One relies heavily on the past market activity, the other is focused on future events. Both of them have their benefits and implementing elements of each one may be a good strategy for a novice investor.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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