Analyzing the market is vital when determining what and when you should be trading. However, deciding on which type of analysis to employ is equally as important, since both technical and fundamental analyses serve their fair share of benefits. Let us break them down for you.
Technical Analysis uses trends to evaluate assets
Technical analysis evaluates assets by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure an asset’s intrinsic value, but instead seek to identify patterns that can suggest future activity. Technical analysis is centered on three claims:
• Market Price Reflects Everything
• Price Movements Follow Trends
• History Tends to Repeat Itself
Fundamental Analysis uses market events to predict price action
Fundamental analysis uses external data to evaluate an asset’s value. Traders perform fundamental analysis by taking into account a wide range of variables including the sales, earnings, products and services of a company, to the GDP, interest rate, and unemployment rate of a certain country. Fundamental analysis utilizes a variety of major market indicators, among them:
• General monetary measures
• Building and housing trends
• National employment rates
• Consumer price indices
• International trade record
• Federal Open Market Committee (FOMC) books
• Manufacturing reports
These two types of asset analysis fall on completely opposite sides of the spectrum, but both can give you a great deal of insight into the market. And while the best strategy continues to be debated, you would be wise to research both methods to determine which would work best with your level of understanding and preference.