What exactly is the difference between fundamental and technical analysis? And why is it so important for the day trader to have an intimate knowledge of both styles of trading? Put simply, the majority of new traders who enter into the markets, filled with dreams of wealth, do not have a good enough foundation of knowledge with which to build up a successful trading career with. And precisely how does one build this knowledge? Start with the basics of both technical trading and fundamental trading.
Technical trading is hugely popular with intraday traders. If you are a new trader you will benefit from quick entry and exit from positions with a sound knowledge base of technical analysis. Put in the simplest way technical analysis means using past price data in order to determine future price movements. An example of this is using resistance and support price levels as a signal for price rises and falls in the near future. But let this not fool you – technical analysis goes much further than this.
Stochastics, moving averages, Fibonacci levels and countless other retracement levels are simply formulas based on past price information. Technical analysis encompasses all this which is why it is crucial that a day trader be familiar with them. It is not uncommon to see a trading screen with many different representations of the price using different graphs and data – in fact this is why multiple computer screens are so common in the financial world.
If one combines this knowledge with that of fundamental analysis, you potentially have the ability to make brilliantly executed trades. And what is the difference? Fundamental trading is the method of using a companies financial results, combined with economic data and government statistics in order to make an informed and deliberated opinion of future price movement.
For example, if you have read that the price of gas is rising, and a recent publicly traded utility company released very favourable results, this will signal to you to buy that stock. Conversely, if unemployment was on the rise and average wages were falling, you may wish to short sell an entertainment index. Fundamental analysis of stocks requires you to develop a good understanding of what you are actually trading, as opposed to technical trading, where you can be looking at any graph (stock, commodity, futures etc) and it wouldn’t matter because you are only concerned with price movement alone.
Clearly, technical trading is designed for quick in and out trades, where a time frame can last anywhere from a few hours to even a few seconds. This is why it is so popular with day traders. Fundamental analysis on the other hand means taking a position where the timeframe is greater than a day (generally speaking).
So why would an intraday trader be interested in fundamental trading?
Speaking from experience, to be a successful trader means being able to read the markets. This is not an easy feat. You need to be able to tie up all the knots and read the signals which are being given to you by the market. Thus, having at least a basic grasp of the fundamentals of the market you are trading will become hugely beneficial in making you a better day trader, and in turn, making better profits.
Also don’t forget to keep a day trading diary to help you keep track of your winning and losing trades. You need to know what you are doing wrong in order to improve. Analyzing your trades can be fun – just kick back after a days trading, get a big cup of hot chocolate, wearing your best all black converse sneakers and read what you did for the day.
In conclusion, I hope you now recognise the importance of having a good knowledge of the two main styles of trading, and I encourage you to learn more if you feel you need to. Happy trading.