Price moves in trends, and a trend in motion will continue in the same direction until a major event causes a change in direction. It takes a great deal of money, time and effort to change a trend.
Everything we need to know is within the price chart itself. Our job as traders is to analyse this data and interpret its meaning. We need to recognise repetitive patterns and how to trade them in order to hit our Take Profit levels.
History repeats itself so the markets move in predictable patterns. These Patterns are generated by price movements which are called signals.
• Chart Patterns and Formations.
• Support and Resistance.
• Turning Points and Trend lines.
Your goal as a trader in technical analysis is to uncover the current market’s signals by examining the past market signals.
Fundamental analysis is looking into the news and micro data of world economics, its more than just an educational pursuit, it is a way of looking at the macro picture, the data is sifted and analysed to determine the future direction of price movement. A trader must recognise key economic reports or political events that can and often do move the markets.
Key Factors that influence the markets:
- Political Instability
- Central Banks
- Interest Rates
- Monetary Policy
- Trade Balance
- Employment statistic
- Currency intervention
- Natural Disasters
- Military Conflicts
“To be a good trader, you need to trade with your eyes open, recognize real trends and turns, and not waste time or energy on regrets and wishful thinking.”
– Alexander Elder
Technical Analysis Versus Fundamental Analysis
Technical analysis is a method of forecasting price movements by looking at purely market-generated data. A trader who uses technical analysis (sometimes called a technician or chartist) is essentially concerned with two things;
1) what is the current price?
2) What is the history of price movement?
Most traders will also keep a close watch on technical indicators, which provide feedback on both the price and market (e.g. moving average, volume, momentum, volatility, open interest, etc). Ultimately, technical analysis utilizes the information captured by the price to interpret what the market is saying with the purpose of forming a view on the future.
Almost every trader uses some form of technical analysis. Even the most reverent follower of market fundamentals is likely to glance at price charts before executing a trade. At their most basic level, these charts help traders determine ideal entry and exit points for a trade. They also provide a visual representation of the historical price action of whatever is being studied. As such, traders can look at a chart and know if they are buying at a fair price (based on the price history of a particular market), selling at a cyclical top, or perhaps throwing their capital into a choppy, sideways market. These are just a few market conditions that charts identify for a trader. Depending on their level of sophistication, charts can also help much more advanced interpretation of the markets.
On the surface, it might appear that technicians ignore the fundamentals of the market while focusing only on charts. However, a technical trader will tell you that all of the fundamentals are already represented in the price. They are not so much concerned that a natural disaster or an awful inflation number caused a recent spike in prices as much as how that price action fits into a pattern or trend. And much more to the point, how that pattern can be used to predict future prices.
The “WHAT” Is More Important Than the “WHY”
Ultimately, price is the end result of the battle between the forces of supply and demand. The objective of analysis is to forecast the direction of the future price. By focusing on price and only price, technical analysis represents a direct approach. Fundamentalists are concerned with why the price is what it is. For technicians, the why portion of the equation is too broad and many times the fundamental reasons given are highly suspect. Technicians believe it is best to concentrate on what and never mind why. Why did the price go up? It is simple, more buyers (demand) than sellers (supply). After all, the value of any asset is only what someone is willing to pay for it.