Technical Analysis vs Fundamental Analysis
Fundamental analysis and technical analysis is the two main schools of thought in the financial markets. Fundamental analysis looks at economic factors, known as fundamentals. However technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Basically a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements.
By looking at income statements, balance sheets and cash flow statements a fundamental analyst tries to determine a companys value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make if the price of a stock trades below its intrinsic value, it's a good investment. It can take a long time for a company's value to be reflected in the market because financial statements are filed quarterly and changes don't happen overnight. Although fundamental analysis goes much deeper than we discussed you get the idea.
Technicians on the other hand, believe there is no reason to analyze a companys fundamentals because these are all accounted for in the stocks price. Technicians believe that all the information they need about a stock can be found in its charts.
Now technical analysis applies to not only Stocks but also ETFs Forex, and Futures. Now as day traders we are making trading decisions based on technical analysis. Here are some examples of Chart patterns, support and Resistance levels, pivot points, Indicators.
Forex Chart Patterns
- Symmetrical Triangles
- Ascending Triangles
- Descending Triangles
- Double Top
- Double Bottom
- Head and Shoulders
- Reverse Head and Shoulders
Forex Support and Resistance
Trading requires reference points (support and resistance), which are used to determine when to enter the market, place stops and take profits. However, many beginning traders divert too much attention to technical indicators such as moving average convergence divergence (MACD) and relative strength index (RSI) and fail to identify a point that defines risk. Unknown risk can lead to margin calls, but calculated risk significantly improves the odds of success over the long term.
One tool that actually provides potential support and resistance and helps minimize risk is the pivot point. A combination of pivot points and traditional technical tools is far more powerful than technical tools alone and show how this combination can be used effectively in the FX market.
Pivot points can be calculated for any time frame. That is, the previous days prices are used to calculate the pivot point for the current trading day.
Pivot Point for Current = High (previous) + Low (previous) + Close (previous three)
The pivot point can then be used to calculate estimated support and resistance for the current trading day.
- Resistance 1 = (2 x Pivot Point) Low (previous period)
Support 1 = (2 x Pivot Point) High (previous period)
- Resistance 2 = (Pivot Point Support 1) + Resistance 1
Support 2 = Pivot Point (Resistance 1 Support 1)
- Resistance 3 = (Pivot Point Support 2) + Resistance 2
Support 3 = Pivot Point (Resistance 2 Support 2)
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