When it comes to trading, two types of analysis are used: technical and fundamental. Technical analysis is way more popular among the traders, however, supplementing it with the other type can improve trading results. In this article, we cover both types.
This analysis utilizes past price action to guess developing trends. The most basic tool used in technical analysis includes charts. There are various types of charts. When it comes to the more common one used by traders, the Japanese Candlesticks, bars are displayed with opening and closing prices as well as highs and lows for each period, which can be a minute, an hour, or even a day.
When selecting a chart for analysis, time periods can be used. A one-minute chart covers hours of past price action. An hourly chart, on the other hand, goes back days. A daily chart shows months. The type of chart selected will depend on trading time horizon. For example, a day trader might use a one-minute chart to see short-term trends, and may supplement it with other charts such as four-hour chart to see longer-term trends and how short-term action fits into them.
When looking at charts, traders look for developing and ongoing trends as well as trend reversals. Prices often form resistance and support points. A resistance point is a price level at which the prices begin to decline. On the other hand, a support point is a price level at which prices stop declining and begin to rise. Of course, these points can be broken, so traders need to monitor their charts.
Traders also look at chart formations such as head and shoulders. The first shoulder is a high, followed by an even higher price (the head), and then by a decline and rise of a second shoulder to the level of the first shoulder. Since the price has declined and didn’t go back to the highest level (the head), it indicates weakness. On the contrary, an inverse head and shoulders formation is considered bullish.
Charts are the first building block in a technical analysis system. Another part, widely used by traders, is composed of moving averages. These can also be set for short-, intermediate- and long-term periods. Often, traders will use two averages: short- and long-term ones. If, for example, a short-term average rises above the long-term counterpart, it is often considered a bullish indicator. If the opposite happens, it looks bearish.
When looking at trends, conformation is needed, so traders add other tools to their technical analysis system, such as oscillators (for example, Relative Strength Index) and/or Bollinger Bands. It is important to have these indicators for confirmation purposes, but they can also give potential divergence signals. For instance, the price starts to rise to the top, but the Relative Strength Index weakens. It may mean the price might soon stop rising and then reverse, especially if it has reached a resistance point.
Overall, technical analysis is very useful, but traders need to be careful since many false signals are given. It is also crucial to get a good technical analysis system. Good online brokers such as AlfaTrade provide good systems together with trading signals.
This analysis relies on accounting and economic measures. When it comes to analyzing stocks, investors look at financial reports, growth rates, performance ratios, and recent news, and seek to determine whether the stock should be bought or sold. Nowadays, investors don’t need to break the numbers, but instead they should understand analyst reports and other key measures.
Coming to forex trading, understanding of international economics, central bank actions, forecasts for interest rates, GDP growth rates, trade balances, and political events is needed. Traders who use technical analysis to trade forex can supplement it with understanding fundamentals affecting currencies. By watching an economic calendar, provided by quality brokers like AlfaTrade, traders can tell when important announcements take place, and so be more prepared for potential large swings in currency prices after these announcements.
Commodity traders also look at events that influence commodity prices. These can be weather reports for agricultural commodities, changes in demand for various commodities, and price of a dollar, among others. Commodity traders often watch the American dollar because there’s a strong inverse correlation between the dollar and the prices of commodities. If dollar rises, some commodities, such as gold and oil, often fall. And, if dollar falls, these rise.
The reason is that commodities are priced in dollars, and dollar’s rise will make them more expensive for buyers using other currencies, so there’s an offsetting fall, and vice versa.
As a trader, you need to know what affects the prices of the financial instruments you’re trading. The more you know, the better your chances for success. Understanding technical and fundamental analyses is very helpful.