Fundamental and technical analysis. What does a trader need to know?

Market liquidity. What does a trader need to know?

In this article, we will not go deep into the terminology because there are many explanations of what fundamental analysis is, what technical analysis is, and what its pros and cons are. In this article, we will try to determine the situations in which traders should use one or another type of analysis.

First, if you trade with high-frequency EAs, arbitrage EAs or scalper EAs, then, unambiguously, this is the case when 100% fundamental analysis will be an unnecessary detail.

In all other cases, even if you are a fan of technical indicators, chart patterns, Elliott Waves, Gann methods, or harmonic patterns, or if you trade intraday, in these cases, you just need to understand the fundamental structure of the instrument and where the price is moving in the long term. For example, suppose the US Federal Reserve actively raises interest rates while Japan's Central Bank keeps rates below zero, and the difference between rates increases rapidly. In that case, this situation will contribute to the growth of USD/JPY quotes because when interest rates rise, the national rate strengthens. You can see this from the USD/JPY chart for the last six months. Understanding this factor alone will allow you to look for your patterns or signals in the right direction. In other words, the fundamental component will be on the side of your position, which will only increase the likelihood of profitability.

In the second case, for example, you trade oil. Understanding that the OPEC+ countries are not producing enough oil to cover demand will drive oil prices higher. Any new sanctions imposed on an oil-producing country almost always result in higher prices. It will also be helpful for forex traders, even if they do not trade oil. For example, the Canadian dollar is a commodity currency, and an increase in oil prices almost strengthens the Canadian currency.

The third case is that you are trading US indices. Indices go up in two cases. First: when the economy is doing great, inflation and unemployment are steady and not rising, and GDP and manufacturing show signs of growth. Second: the Central Bank sticks to its stimulative policy and pumps more money into the economy. In the opposite cases, indices will fall.

Example. The US Federal Reserve is now tightening monetary policy through higher interest rates and reducing the Fed's balance sheet. Cutting the Fed's balance sheet is the opposite of printing money when excessive amounts of money are withdrawn from the financial system. Inflation is at record levels, US GDP is declining, and industrial and business activity is falling. No wonder why the S&P 500 (US500), Dow Jones (US30), and Nasdaq (US100) indices have been declining since the beginning of the year. And the market reversal will take place when the US Fed stops tightening monetary policy and other economic indicators stop declining while inflation starts to roll back.

Statistics show that you cannot be a successful trader in the long run without adding fundamental factors, the main of which are: central bank monetary policy, inflation rate, unemployment rate, production levels, business activity, GDP, trade balance, real estate market, consumer confidence, and others. It's worth spending some time on this, but in the end, it will pay off in the form of new profitable trades. And remember, all successful hedge funds have whole departments of economic research and analysis of fundamental factors. And this is not just for fun. Be an informed trader.

Have a good trade.

Start trading

by JustMarkets, 2022.09.30

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