Apart from having a bear or a bull approach towards market trends, there are two main types of traders, namely fundamental and technical traders.
The fundamental traders’ trading decisions are based on market news and corporate data, while technical traders try to analyse the charts and this way they seek to predict the possible direction of the specific instrument. Of course both party think they are right and the other party is wrong.
It’s really hard to decide what types of traders are more successful, because there are examples from both groups. It also depends on what instruments you trade. Some traders can be really good with stocks if they are up to date with the underlying company’s data. However for example on the forex market where a very big percentage of the trading activity is done by robots it’s quite important to consider technical levels as well.
When we talk about fundamental analysis we mean analysing actual economic data. We can analyse corporate reports, macroenonomical reports such as GDP and inflation numbers, and interest rate decisions among others. Financial intstruments tend to react intensively when unexpected events occur.
Some traders try to trade these so-called fundamental announcements. When good or bad data get released about a corporation it can determine the direction of its stocks for a while and can bring good trading opportunities for the traders.
Sometimes disasters can also happen for example the 11th September terror attacks. These are absolutely unexpected events and this time most participants of the market start panicking and sell their assets thus avoiding further risks.
These sell-offs can create huge turbulances on the market as more and more people start selling when they see that the price sharply falls. In times like this huge losses can take place just in a few days. This is one of the reasons for using a stop loss because unexpected market events can and will occur from time to time.
Economic cycles and crisises
The economy moves in a cyclical way therefore there are times when corrections occur meaning the trend breaks for some time. It can be just a few days but, several weeks or months and even years. For instance during the 2008-2009 economic crisis many stock markets suffered around 50% losses.
When prices are at a low level for a longer time buyers slowly come back to the market and the price starts rising again.
Such event took place in 2009 when everything could be bought for a very cheap price. Many economists called that period the start of the latest bull market*.
*generally everything is in uptrend, there are more buyers than sellers
Sources for economic news
There are many sources to find out about fundamental news. The most often used source for learning fundamental data is http://www.forexfactory.com
This site marks the importance of the data. Yellow news usually don’t cause considerable movements, orange ones can cause some changes but not really strong ones and red news cause significant movements most of the time, especially when the numbers are different than expected.
Sometimes celebrities promote companies and this can create strong demand for the stocks of the promoted firms. It can be intentional or random. Several companies pay for endorsements and this method can boost sales thus make the stock price higher.
When a filmstar wears a branded accessory afterwards many people might want to copy his style. For example following Tom Cruise’s performance in Top Gun wearing Ray Ban sunglasses Ray Ban’s sales rocketed.
Technical traders look at the graphs and try to predict where the instrument will go. There are several indicators which use mathematical calculations. One of the most popular indicators is the RSI, that stands for Relative Strength Index.
If its level is over 70 it means the instrument is in the oversold territory hence a pullback is expected soon.
If it’s between 50 and 70 it is a bullish sign.
If it is around 50 it’s a neutral sign meaning the bulls and the bears can’t decide which way the intrument should go.
If it is between 30 and 50 it is a bearish sign.
If its under 30 it means that the instrument is in the oversold territory and a rebound can be soon expected.
There are also many patterns on the chart that traders use to predict the directions. Some patterns signal a trend reversal while others confirm the continuation of the current trend.
The main ones are the following:
Double bottom: when price touches the bottom line again it can be a buy signal that lasts to the top of the previous high.
Double top: it is the reversed version of the above formation.
Head and shoulders: it is a relatively rare but strong formation and when price reaches the right “shoulder” it signals a strong selling signal that can last to the previous low.
Reversed head and shoulders: it is the reversed version of the above formation.
Triangle: when triangles are formed prices tend to go in the direction where they broke out from the triangle.
There are several other formations, but most of the traders (even the professionals) use the main ones above to predict the movemnets of the prices.
“Trend is my friend until it bends.” As the saying goes, the most fundamental tradig technic is get on the trend, go with it and get off before it ends.
Of course it is not as easy as it sounds, but it is still much better to follow the trend than play some extra risky counter trend techniques that won’t work most of the times.
We are talking about trends when we can see higher highs (uptrend) or lower lows (downtrend).
If we connect the lower lows or higher highs with a line we can see a trendline and we can stay in position till the rate breaks down the trendline.
This is the most basic trading technic nonetheless it is very effective and has a very high hit rate.
There are three main types of charts namely bar chart line chart and candlestick chart. Most traders use candlesticks charts because candles are the most accurate in predicting expected price movements. Reading candles takes some time but once we get used to them they will tell us a lot about the current picture of the instrument.
Candles can be used for all the time frames from 1 minute candle to month candle. The bottom line is the colour of the candle.
When the price closes higher in the given timeframe than where it started it is a bullish candle (usually green clour is used to indicate this) and when the price closes lower than where it started it started it is a bearish candle.
Once you familiarize yourself with trends,chart patterns and candles you will be ready to start trading as a technical trader, but I strongly suggest checking the date of fundamental announcements prior to trading as the news can seriously upset the picture.
If you are interested in other trading related topics, read about trading psychology and money management!
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