Fundamental analysis and technical analysis are the two major ways of analyzing financial markets.
Using fundamental analysis as a trading tool entails observing the trend of various macroeconomic indicators such as growth in output, interest rates, inflation, and unemployment. One combines all this information to assess current and future performance of financial assets. Traders employing fundamental analysis need to continually keep abreast of news and announcements that can indicate potential changes to the economic, social, and political environment.
The most important rule in fundamental analysis is that prices move primarily based on supply and demand. A financial asset trends upward because there is demand for it, regardless of the type of demand e.g. hedging or speculation. Asset movements are based on the need for that asset. Securities’ values decrease when there is excess supply. Supply and demand should be the real determinants for predicting future movements.
In technical analysis, historical price patterns are used to predict future movements. The assertion of technical analysis is that all current market information is already reflected in the price of assets; therefore, studying price action is all that is required to make informed trading decisions. In addition, technical analysis works under the assumption that history tends to repeat itself. The primary tool in technical analysis is charts. Charts are used to identify trends and patterns in order to find profit opportunities. The most basic concept of technical analysis is that markets have a tendency to trend. Being able to identify trends in their earliest stage of development is the key to technical analysis.
Technical analysis tools such as Fibonacci retracement levels, moving averages, oscillators, volume indicators and candlestick charts provide further information on the level of emotional extremes of buyers and sellers. This enables one to know where levels of greed and fear are the strongest.
Before implementing successful trading strategies, it is important to understand what drives the movements in financial markets. The best strategies tend to be the ones that combine both fundamental and technical analysis. Too often perfect technical formations have failed because of major fundamental events, the same occurs with fundamentals.