Technical analysis or fundamental analysis?

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Technical analysis and fundamental analysis are two different methods of analysis. They are very often compared, opposed and sometimes associated. Should a novice trader choose technical analysis or fundamental analysis? What are the advantages and disadvantages of each method?

Definition of technical and fundamental analysis[/h2]

Technical analysis is based on the study of asset price histories. Traders then focus on past price movements, studies investor psychology, and use technical tools to anticipate future price movements. Technical analysis is based on probabilities. This or that configuration allows you to determine the probability of a scenario (bullish or bearish) based on statistical studies.

Fundamental analysis is based on the study of financial indicators. Traders then focus on the various economic data published, study experts' expectations, and look out for publication of economic figures. The purpose of fundamental analysis is to determine the theoretical price of various assets. Traders seek to find assets with a price significantly different from this theoretical price.

Advantages of technical analysis



- Enables anticipation of future price trends: Chart configurations give an indication of the probabilities of a future increase or decrease in assets. Each chart pattern is associated with bullish or bearish probability. It is also possible to determine the probabilities that the price objective will be achieved depending on the type of pattern. The same applies to technical indicators. Their relevance can be measured by conducting a statistical study.

- Enables detection of reversals: Some chart configurations enable anticipation of a trend reversal or a technical correction. A position can be opened early, in some cases, which enables optimization of the trade’s performance.

- Provides an understanding of investor psychology: Analysis of price charts and Japanese candlesticks enables investors’ psychology to be deciphered and resistance and support levels to be plotted. It also makes it possible to identify the key levels on the asset (levels that have caused reversals in the past, high levels of support/resistance, etc.)

- Enables precise determination of entry and exit points
: For a trade to be successful, timing is an essential element. Technical analysis makes it possible to set specific entry levels and price objectives.

- Enables trading on all time units
: Technical analysis can be used on all time units. Whether you are a short, medium or long term trader, it adapts to your time schedule and trading preferences.

- Diversity of trading tools: Technical analysis includes chart patterns, Japanese candlesticks, technical indicators, etc. There are thousands of trading strategies! You can therefore find the strategy that best suits your investor profile.

- Ease of use: Learning the basics of technical analysis requires time and work, but it is market experience that takes precedence over technical knowledge. The hardest part is not finding a winning trading strategy but being able to apply it over the long term by managing your emotions and having strict risk management.

Advantages of fundamental analysis



- Enables understanding of an asset’s trend: Studying economic indicators makes it possible to understand the logic of an asset’s increase/decrease. Traders feel less dependent on the market. As long as the conditions that triggered the purchase or sale of the asset have not changed, traders don’t question the scenario’s achievement.

- Reduced stress: Fundamental analysis gives long-term signals and does not apply in the short term (except for high frequency trading). Since positions are usually held over several weeks, months or years, stress is less important. Traders do not need to monitor trades regularly. Opening a position is more like investing than trading.

- Simplified emotion management: In the financial markets, the psychological factor is the number one cause of loss for novice traders. Due to the reduced number of positions and the low time spent looking at the curves, it is easier to manage your emotions. Traders do not have to incur correction movements, do not have to manage a series of losing trades, etc. Traders apply their trading plan and stays within it much more easily.

- No conflicting signals: Fundamental analysis tells you to either buy or sell. The time unit is not considered when opening a position, there is no possible contradiction in terms of signals as can be the case with technical analysis. Fundamental analysis simply looks at the long-term trend.

- Greater objectivity: Fundamental analysis is connected to reality. Unlike technical analysis, it leaves no room for interpretation. It is based on facts, on an economic reality through the study of various economic figures. It is a more logical and scientific approach than technical analysis.

Conclusion



Technical analysis and fundamental analysis both offer advantages, one is not better than the other. Technical analysis is often preferred by individual traders because it is simpler, technically speaking. It does not require any special knowledge and understanding of the economy. However, this is often a trap for novice traders. This simplicity hides the importance of money management and emotion management for successful trading. It is not the technical analysis that is responsible for the loss of numerous traders in the financial markets, it is the misuse they make of it.

Fundamental analysis requires more detailed economic knowledge to understand and be able to analyse various economic indicators. It is often preferred by professionals who, however, associate it with technical analysis in order to optimize their entry points. This is obviously the best solution, but using technical or fundamental analysis alone is more than enough to succeed in the financial markets.

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