Technical analysis
Generally speaking, there are two approaches that traders use to determine whether the market will move up or down. It is fundamental and technical analysis, which is similar to buying a car. You can analyze its price, but you can also look at its engine, chassis and other parts.
Fundamental analysis focuses on the financial information of companies, commodities or currencies. Technical analysis focuses on a graph of predictions of future price movements.
There are three principles of technical analysis:
- The market shows everything
- Prices are moving in trends
- History repeats
The market
Technical analysis only considers price movements. It ignores the underlying factors. Also, it is assumed that all these factors affecting market’s price are contained in these movements. All that needs to be considered is the price itself. Right now, the best website for technical analysis is Trading View.
An unexpected event, such as a natural disaster or geopolitical tensions, may have an impact on a particular market. On the other hand, the technical analyst is not interested. The technical analyst focuses on the graph itself and candle shapes and the formations that appear in the graph.
Prices are moving in trends
The technical analysis assumes that price movements will follow trends. This means that, once the trend has been determined, the future price movement is likely to go in the same direction as the trend than against it. Most technical business strategies are based on this concept.
Forecasting the future
The technical analysis reflects the forecast of future price movements, based on past price reviews. Technical analysts believe that if DAX has grown recently, it may develop further in the future. This mainly because it has an upward trend. There are many different techniques to identify trends. But like the weather forecast, the results of the technical analysis do not cover all possible opportunities. Instead, technical analysis can help investors predict what prices are likely to happen over time.
Fundamental analysis
The two most common ways of analysing financial markets are technical and fundamental analysis. Trends and patterns help determine where prices will go. Fundamental analysis focuses on all available data to help determine the relative value of the market. Technical analysis focuses mainly on price movements. Then it looks for discrepancies between the current market price and its own valuation for current business opportunities.
Suppose you want to buy a car. You’ve seen one that you like for certain amount of money. But you don’t know if it’s a reasonable price. You will search the Internet or ask your friends for their opinion. Also, you will compare them to prices in other stores. But finally, you will do a general survey. This to see if the price is “fair” and whether the car is worth the money or not. What you would do in this scenario is basically a fundamental analysis. You will consider all the underlying factors that play a role in deciding whether a price reflects the true value of an asset.
Where to find the data for fundamental analysis
Fundamental analysis analysts use a range of available data. This includes reports on corporate earnings, geopolitical events, central bank policies, environmental factors, and more to help them realize the analysis. They are looking for information to help them estimate the future direction of the market.
Such sources can often be found in macroeconomic data. It is very important for fundamental traders to know when and where important data is published. Market developments are usually driven by key macroeconomic data that could affect the market and provide volatility. Here there are some examples of macroeconomic data, and why they may have an impact on financial markets:
Inflation
Inflation is the rate at which the general level of prices of goods and services is rising. Central banks are trying to curb inflation and avoid deflation in order to maintain their country’s smooth economy. They do this using interest rates. When central banks announce rate increases, this can often lead to the appreciation of the currency.
Unemployment – Labor market data, such as NFP (non-farm payrolls) reports from the US labour market. They have a high impact on the financial markets and can increase the volatility of indexes and forex. The employment report is published on the first Friday of the month. It represents the total number of paid US workers. Markets are very sensitive to this type of data. Mainly because they are important in determining the rate of economic growth and inflation.
Accordin to different analysis, if the NFP figure increases, it is a good signal that the economy is growing. But, if there is a rapid increase in NFP, it means that inflation can rise. When the NFPs are below expectations, Forex traders could sell USD in anticipation of the currency depreciation. But, if the result goes above expectations, the value of the US dollar may increase.
GDP
GDP – gross domestic product is a measure of all products and services produced in a certain period. Central bankers and investors monitor GDP growth to see if the economy is getting stronger. As the economy grows, companies generate higher profits and people earn more, leading to a growing stock market. Consequently, they will have a stronger currency.
The way in which macroeconomic indicators can affect the market depends strongly on market expectations. Generally speaking, the greater the difference between expectation and reality, the greater the response. If the market expects the central bank to raise interest rates, the reaction is already reflected in market movement. On reality, nothing much happens. However, when markets are surprised, volatility and large movements may occur.
All fundamental data can be found in the macroeconomic calendar. The impact on the market is highly dependent on a comparison between the actual results of the macroeconomic data and the market expectations. The larger the difference, the greater the impact on the market. You can find information on basic dates in our comprehensive macroeconomic calendar. The classification of each report is recorded as very important, medium, or minor. Mostly, in terms of the impact of the reports on markets and the potential for market volatility.
What Affects Fundament?
As already mentioned, one of the most important factors in the fundamental analysis is the monetary policy. It is mainly conducted by central banks. Interest rates, open market operations, and central bank interventions affect market conditions. Financial analysts and traders follows this closely. The most influential central bank in America is the Fed (USA). In Europe, the Bank of England (UK) and the European Central Bank (EU). And in Asia, the Bank of Japan (Japan).
Let’s look at an example. The US economy increased by 3% in the first quarter of 2017, while annual inflation reached 2.5%. The Fed decided to raise interest rates. Interest rates have risen, so traders have decided to put their money in USD because they will be more profitable. Such a move leads to higher demand for the US dollar, which is strengthening.
What else you should know about fundamental analysis
The fundamental analysis also considers external influences that could affect the value or movement of prices on the markets. Natural disasters such as floods or earthquakes can also have a major impact on markets. For example, the explosion of an important oil pipeline may lead to a rapid rise in oil prices. The commodity becomes more difficult to transport and purchase. In such a situation, you could open a long position on CFD Oil and profit from any price increase.
Summary
The fundamental analysis uses all available data to determine the value of the instrument. Unlike technical analysis, which focuses primarily on historical cost and trends.
The fundamental analysis addresses other aspects, including political, social and economic factors, as well as macroeconomic reports and corporate earnings. While technical analysts believe that all the information they need is contained in the chart.
We should not exclude either Fundamental or technical analysis. Most successful traders recommend a combination of both.
