There are two main approaches to market analysis in trading - fundamental and technical. Both methods have their advantages and features, and understanding their differences will help you choose the optimal strategy depending on your goals and trading style.
✅Fundamental analysis
Fundamental analysis (FA) is based on studying economic, financial, and social factors affecting asset prices. Traders using this method assess the intrinsic value of an asset considering macroeconomic indicators, news, and events.
Principles:
Macroeconomics: analyzing economic data such as GDP, unemployment rates, and interest rates.
Company reports: for stocks, this includes financial statements, quarterly results, and debt load.
News and events: political situation, central bank decisions, geopolitical risks.
When to use:
For long-term investments and asset price forecasting (e.g., stocks, currencies).
When macroeconomic changes or events are important and can significantly impact the market.
Example:
Fundamental analysis may suggest that Tesla stock will rise if a successful quarterly report is released, or if changes in legislation positively impact its business.
✅Technical analysis
Technical analysis (TA) focuses on studying historical price and trading volume data. Traders using this method analyze charts and apply various indicators and oscillators to forecast future price movements.
👇🏻Principles:
Charts and patterns: studying price charts (candles, trend lines, support and resistance).
Indicators: using technical tools such as RSI, MACD, moving averages.
Trends: identifying trends and corrections, analyzing possible reversals.
When to use:
For short-term trading strategies (e.g., scalping, day trading).
When it is important to understand market psychology and use historical price information to forecast movement.
Example:
Technical analysis may show that Apple stock has reached a resistance level, and a trader may expect a correction or reversal.
What to choose❔
Fundamental analysis is suitable for those focused on long-term investments and wishing to deeply understand economic and financial processes. This method allows for more informed forecasts but may require more time for analysis and decision-making.
Technical analysis is ideal for traders working in the short term and preferring quick trades. This approach helps identify trends and entry/exit points based on charts and indicators.
📝
It is best to combine both approaches, using fundamental analysis to determine long-term prospects and technical analysis for precise entry and exit points. It is important to understand that each of these methods has its advantages, and the choice depends on your strategy and trading style.