Fundamental analysis or technical analysis? You will almost certainly have asked yourself at least once which of the two “big schools” to follow. In trading, technical analysis and fundamental analysis they have their respective strengths and weaknesses, but for the traders I contacted there are 5 reasons why technical analysis is better than fundamental analysis.
What is technical analysis in trading
Technical analysis is the process that allows you to search for trading opportunities based exclusively on price movements, or other technical indicators such as volume, moving averages and many other indicators. A statistical approach based on numbers and graphs.
This type of approach allows you to focus 100% on the numbers and determine the likelihood that the price will rise or fall in the future. In trading, 100% security does not exist, which is why I always speak only of probability. Well.
What is fundamental analysis in trading
The fundamental analysis is a completely different approach, it is based on the analysis of the assets and income data of a company and involves the “calculation” of the intrinsic value of a company. To use fundamental analysis in trading it is necessary to include information on business management, economic factors, financial numbers, etc.
Many people trade exclusively with fundamental analysis and there is nothing wrong, but many experienced traders believe that fundamental analysis is too complicated for a private trader. This is because it takes a lot of time and effort to learn all the information necessary to try to “predict” the performance of a security with fundamental analysis, knowing that there is no certainty about the performance of a trade.
Of course, if you are lucky enough to know someone who gives you privileged information about a company, you will surely have more opportunities, but not everyone has an uncle who is the General Manager (for the record: do insider trading is a crime in many countries)
That said, here are the 5 reasons why technical analysis is better than fundamental analysis in trading.
Why use technical analysis in trading
A clarification: to say that “technical analysis is better than fundamental analysis” does not want that fundamental analysis is useless in trading, that everything concerning it should be excluded. For example, referring to point 1, it is obvious that it is useful to update yourself on economic news: but those who trade with technical analysis may be less updated and obtain results.
1 – You can trade by ignoring in the news
Many traders base their operations entirely on economic news and on the news of the day and there is nothing wrong, as long as it is sustainable for you in the long run and with your character. Often this approach requires a lot of work and stress to keep up with news from around the world, constantly evolving and changing.
The economic news obviously influences the markets… the bad thing is that by the time a private trader becomes aware of this news, it is already too late. The big financial institutions and banks almost always know everything in advance and make their moves well before all private traders, who thus risk finding a market that has now taken another direction.
In fact, the price often goes in the opposite direction to that expected by most people after great news. This is something to keep absolutely in mind if you are new to trading.
Unless you have powerful algorithms that allow you to perform operations in fractions of a second, this type of approach is not suitable for private traders (99% of people lose money by investing in news). Forget about it if you don’t want to lose money.
2 – Technical analysis in trading allows you to focus on price
Price and numbers play a fundamental role in determining where and how to open a trading position. Indeed, for many experienced traders the price is the number one indicator.
If you focus on the price, you can recognize and avoid many false news and gossip that invade newspapers or major business newspapers. If you focus on the price, you have more control of your decisions and operations and you can manage everything with a mathematical and statistical method based on numbers, which are always objective.
3 – With technical analysis trading is less emotional
A big difficulty of trading depends only and exclusively on the emotional part. The fundamental analysis requires a lot of external information that is often unpredictable or unexpected and that can arouse fear, greed, nervousness, excitement.
These emotions can divert your mind from the general market trend and make trading hell. Do not let emotions cloud your judgment and always work mechanically and impartially, faithfully following your trading strategy even in the most negative phases.
4 – Technical analysis in trading shows you the “key levels” of price
This point is directly connected to reason number 2. The technical analysis and the use of graphs allows you to quickly and easily identify all those key levels where the price finds supports and resistances.
There are some “natural” supports and resistances easily identifiable on a technical chart but practically impossible to find with fundamental analysis.
5 – With technical analysis you can trade on every market, even if you don’t know it
“Give me any chart that I have never seen and I can trade it as if I have known it for years”: this is what an expert trader who trades with technical analysis says. It seems absurd but believe me, it is so: whether you trade forex, stocks or futures, you can apply the same technical principles to operate professionally.
If you focus on price, support, resistance and some selected indicators, you can move from market to market in search of the best opportunities present at that time.
Of course, there are small differences to take into consideration between the various markets, for example the volume that is used to trade the shares is not needed in forex. But if you trade with fundamental analysis you will need a lot more data and knowledge for each type of market, and this makes trading much more complicated.