How Technical Analysis Differs from Fundamental Analysis in CFD Trading
CFD trading is a popular way of speculating on the price movements of various financial markets, such as forex, stocks, commodities, indices, and more. CFDs are contracts for difference, which means that you don’t own or take delivery of the underlying asset, but instead, trade on its price change.
CFD trading can be risky and complex, so it’s important to have a solid understanding of how to analyze the markets and make informed trading decisions. There are two main types of analysis that traders use: technical analysis and fundamental analysis. In this blog post, we will explain what they are and how they differ.
What is Technical Analysis?
Technical analysis is a method of studying the past price movements and patterns of an asset using charts and indicators. Technical analysts believe that history tends to repeat itself and that by identifying trends, support, and resistance levels, breakouts, reversals, and other signals, they can predict future price movements and find trading opportunities.
Technical analysis can be applied to any time frame, from minutes to months or years. It can also be used for any market or asset that has sufficient historical data. Some of the common tools and techniques used by technical analysts include:
– Trend lines: These are straight lines drawn on a chart to connect higher highs or lower lows of an asset’s price. They indicate the direction and strength of a trend.
– Support and resistance levels: These are horizontal lines drawn on a chart to mark where an asset’s price has bounced off or reversed from in the past. They indicate potential areas of buying or selling pressure.
– Chart patterns: These are shapes formed by an asset’s price movements on a chart. They can signal the continuation or reversal of a trend depending on their type and direction.
– Indicators: These are mathematical calculations based on an asset’s price or volume data. They can provide additional information about an asset’s momentum, volatility, trend strength, overbought or oversold conditions, and more.
– Candlestick patterns: These are graphical representations of an asset’s open, high, low, and close prices for a specific time period. They can reveal the sentiment and psychology of traders behind each price movement.
What is Fundamental Analysis?
Fundamental analysis is a method of studying the intrinsic value and performance of an asset based on its underlying economic factors. Fundamental analysts believe that the market price of an asset may not reflect its true value at times due to various external influences such as news events, market sentiment,
speculation etc., so they look for undervalued or overvalued assets based on their fundamentals.
Fundamental analysis can vary depending on the type of market or asset being analyzed. For example:
– For forex markets: Fundamental analysts look at factors such as interest rates, inflation rates, GDP growth, trade balance, political stability, etc., that affect the supply and demand of different currencies and their relative value.
– For stock markets: Fundamental analysts look at factors such as earnings, revenue, dividends, cash flow, assets, liabilities, etc., that affect the profitability and growth potential of different companies and their share prices.
– For commodity markets: Fundamental analysts look at factors such as supply and demand, production, consumption, inventories, weather, etc., that affect the availability and scarcity of different commodities and their prices.
How do Technical Analysis and Fundamental Analysis Differ?
Technical analysis and fundamental analysis differ in several ways:
– Technical analysis focuses on what has happened in the past (price action) while fundamental analysis focuses on what is happening now (current events) or what will happen in the future (expectations).
– Technical analysis uses charts and indicators while fundamental analysis uses reports and data.
– Technical analysis is more objective while fundamental analysis is more subjective.
– Technical analysis can be applied to any market or asset while fundamental analysis may require specific knowledge or expertise for each market or asset.
– Technical analysis can be used for short-term trading while fundamental analysis can be used for long-term investing.
Which Type of Analysis Should You Use?
There is no definitive answer to which type of analysis is better than the other. Both have their advantages
and disadvantages depending on your trading style, goals, risk appetite, and preferences.
Some traders prefer to use only one type of analysis, while others like to combine both types to get a more comprehensive view of the market.