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Technicals and Fundamentals Explained

Traders and investors use two primary methods to support their decisions; fundamental and technical analysis. Fundamental analysts anticipate price movements by analysing company, economic and financial criteria. Technicians study price charts to inform their direction of trade.

 

Technical and fundamental analysts use their own terminology, employing different viewpoints and methodologies to assess market conditions and the probable direction of price. Each school of thought has loyal followings and their proponents hold strong beliefs about their technique, and superiority thereof. Since fundamental and technical analysis both have distinct strengths and weaknesses, most large financial institutions employ both methods to inform their market activities.

"Both analyst groups accept that all information available in the public domain is already priced into the market ."

Data needed to conduct thorough fundamental analyses comes from shareholders, investor relations officers, market research and the macro economic considerations such as the political climate, GDP, exports, imports, interest rates, exchange rates and inflation. Fundamentalists such as Warren Buffet also study company PE ratios, Income Statements, Balance Sheets, Cash Flow Statements, company leadership and senior management, and the application of company equity valuation models. Price is influenced by changes throughout the trading day as investors react to information and market conditions.

"It is best to use both methods to select high-potential trades."

One can have a preference for technical analysis and studying price charts, and still use fundamental analysis to put the market and trading conditions into perspective. Use fundamental analysis to determine what part of the business cycle the market is in to anticipate the best growth potential opportunities. Technical analysis can then be used to study price charts and trends to help fine-tune profitable prospects. 

 

A trading strategy that combines both distinct approaches gives one a powerful edge to make consistent profits in the financial markets.

 

 

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