Where fundamental analysis is good for understanding
long-term growth or decline of stock price movements, technical analysis can
serve as an excellent tool to help with short-term online trading. There is an
underlying difference between the two techniques which makes them so distinct
and unique in their own right.
The fundamental approach is primarily concerned with
studying any events or developments directly or indirectly impacting the
movement of stocks and holding a position long enough for that event to
translate into the right kind of price movements. On the other hand, technical
approach is more about studying stock movements with the help of detailed
charts and graphs in an attempt to identify useful patterns which can indicate
when to buy or sell.
Technical traders believe that the factors considered in the
fundamental approach are already accounted for in the current price of stock,
so there is no reason to study fundamentals. Instead, they prefer to go by
unique patterns and geometrical formations which occur in graphic
representations of price movements to predict future changes in stock prices.Online traders look for the best time to trade in the short-term which could be
anywhere from minutes to hours, days or even weeks, based on particular
patterns forming or appearing in these charts representing historical price and
volume data for any stock.
It must be remembered that technical analysis can be used
for almost any form of security including equities, futures and commodities,
forex or fixed-income securities. The only basic premise is that historical
data for price movements and volumes traded should be available to online
traders for that type of security. Technical analysis makes some important
assumptions, one of which is that price movement is usually in trends and once
a trend has set in, it is likely to continue in the direction established by it
rather than against it.
These trends can broadly be classified into three
categories, upwards, downwards and horizontal/sideways trends. A trendline is
used in technical charts to point out the relevant stock trends. Channel lines
are used parallel to trendlines to mark the support and resistance levels. The
support level is considered to be the lower price level below which the stock
has very little chance of falling and resistance is the upper price level above
which the stock has very little chance of rising in the stock market. Volumes
traded have also to be considered which indicate the level of activity in a
particular stock.
Usually, four types of charts are employed for online
trading analysis, which include line charts, bar charts, point and figure
charts and candlestick charts. There can be different types of patterns which
can indicate a reversal of the price trend or continuation in keeping with
their individual significance. Moving averages, indicators and oscillators are
used by technical traders to study different aspects of stock movements and
gain a better understanding of the stock market behavior in the short-term.
It should be kept in mind that although fundamental and technical
analysis represent two completely different approaches for analyzing stock
movements and predicting future activity, yet it is possible to combine them in
a balanced manner to manage the risks better and maximize opportunities in
online trading.
Ashlar Online offers expert fundamental and technical
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