Tuesday, October 22, 2013

Technical and Fundamental Analyses: Friends or Enemies?

Which type of analysis provides high returns? How does it happen when these two approaches contradict? To describe directly, fundamental analysis aims at determining the price value by taking into consideration macroeconomic events, business strength and financial analysis.
Technical analysis on the other hand is not connected to economic and political events, it is the analysis of the market based on the past market performance considering the statistics of various outcomes, chart activity of price movements, volume and moving averages.
Technical analysis contains psychological aspects of market, however fundamental analysis doesn’t include investor psychology factor. It is based on the belief that fundamentals will rule for long term, and short-term psychological blips will correct themselves. In general, the investors interested in the specific type of analysis are different. Fundamentalists are usually long term traders by nature, however technicians are usually short-term.
The supporters of technical analysis confirm that fundamental analysis may lead to improper valuations and thus be a result of incorrect decisions as here the information to follow is mostly backward-looking. It is focused on what has already taken place. The information is used for further predictions. The main problem here is that forecasting is always subjective. It is based on the expectations and disclosures of company management.  
Conversely, those who criticize technical analysis believe that chart patterns work till the failure which may not be predicted by following the past pattern, particularly if there is an unforeseen shock.

The only way to curtail the drawbacks of the two analysis methods is to use both of them together thus combining the best aspects. Fundamental analysis should be focused on determining which stocks are most likely to perform well depending on strong macroeconomic environment.  Technical analysis then is going to be used to decide the time of sale and purchase by giving entry and exit points based on volume and price trends, as well as moving averages.
By combining and employing both strategies together you will avoid buying into stock CFDs that have already become overvalued, escape buying high or selling low which frequently occurs because the psychology starts to rule trading.
It’s not right to contradict technical and fundamental analyses. The same indicator can give information both to the technician and fundamentalist. For example, it’s well known that the greater the price volatility is, the greater the risk will be. This indicates that fundamentals are changing. As a result, there will be correspondence on the buy/sell decision.

In conclusion, the best way to make profit is to have ability to combine different styles. In order to have a complete investment picture you shouldn’t use technical and fundamental analyses separately. Used together, these methods can provide a better investment opportunity than either used alone as in this way the generated information is collective and complete.

Author bio: As an experienced content writer Anahit appreciates the unique style and original way of writing. Each article should be expressed in such a way that you can listen to “the voice of author”.   This is actually what she takes into consideration while creating content. The domains in which she is interested and therefore writes articles are Personal Finance and Forex Trading. You can find her articles on   her own blog http://www.trading-techniques.com/. Moreover, currently she contributes to a number of other websites by doing guest blogging and would be glad to get contacted with as many bloggers as possible.

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