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One of the first things traders notice when starting to learn about financial markets is that technical and fundamental analysis are the pillars for understanding what’s moving prices over any given period of time.
Each serves different purposes, which is why putting them in contrast can help people understand some of the subtle details that may eventually lead to efficient trade placement, fewer losses, and the ability to stay one step ahead of other traders – especially those who still rely on hunches.
Advantages of technical analysis
Technical analysis is more about timing and accurate trade placement. It is not enough to spot the dominant trend, since people also need to get in when there is a price directional bias. Impulsive moves start and end near critical support/resistance areas and by using the tools provided with any online trading platform, traders are able to spot such “levels of interest”.
Trade placement is now even more important as the recent ugly day for markets has shown that valuations can slump impulsively even during a holiday. Such events can wipe out days or even weeks of returns in a short span, but with technical analysis, traders can spot changes in the price action structure and act before things get worse.
Platforms like MT4 or MT5 have a lot of useful technical analysis tools, which is why millions of traders around the world still use them.
Is Fundamental analysis outdated?
On the other end of the spectrum, fundamental analysis is more about understanding the underlying factors that drive markets. When it comes to stocks, traders still need to have accounting knowledge and analyze indicators like PER, EBITDA, fair value, book value, and others.
However, for the time being, such analysis seems to have shifted in the rearview mirror. Although some experts believe stock markets are in a bubble, there continue to be massive inflows, as there are no better alternatives currently.
Interest rates are projected to remain low for an extended period of time, as central banks need to stimulate a fragile economy that went through a global pandemic. The exuberance is so great that even companies that are not profitable at all benefit from stock buying.
Finding the right balance
Responsible traders should be aware that such exaggerated price moves can’t last forever and a high-volatility environment can have negative consequences for those with little experience in the markets. As a result, the debate around technical or fundamental analysis should settle around the idea that both serve different purposes and it would be appropriate to strike the right balance between them.
The bottom line
Confidence that liquidity is to remain abundant has been keeping risk sentiment elevated for a long time now. However, as fiscal and monetary stimulus is waning, traders might find themselves in a position to get back at analyzing fundamentals. Those with a conservative approach will be the most favored as they aren’t exposed to assets that are bidded higher for no solid reason.
It’s best for traders to use fundamental analysis to understand the big picture, while technicals can provide further help in spotting the right trade placement.
