Technical Analysis
With technical analysis, we focus on price movement visible on a chart. All current market data and past market moves, are visible on the charts. Technical analysis is one of our most trusted tools for developing solid trading strategies.
Fundamental Analysis
With fundamental analysis, we look at economic data reports and news headlines.
We won't go too deep into economics like how an increase in the unemployment rate affects a country's economy. We only look at the time of these releases to determine when we are likely to see a lot of volatility in price action.
Previously, economic data reports could have been traded, but these days high-frequency institutional trading bots manipulate the price too much for us to build a strong trading plan from the report data.
Traders believing in fundamental analysis have a saying that goes "Trade the rumor and sell the news"
This is why we only need to know when a high-impact data report is released, to determine when we should be cautious of taking any short-term trades.
In many cases these economic reports will move price in our long-term trade direction.
Fundamental analysis can be a strong tool when planning a long-term investment. Some swing traders only use fundamental analysis to build their trading plans. In most cases, the price will move irrationally compared to the interest rate or any other economical data and it's easy to understand why. The marketplace has live open trades and is driven by emotion, the same way your everyday life is driven mostly by emotion.
For example, if you have a business full of inventory, you would still want to sell those products for a profit, regardless of what economical data says. A trader with open positions would also want to close those positions for a profit when the price reaches his target. This will move the price regardless of economical data.
Sentiment Analysis
Sentiment analysis is used to determine how other traders feel about the current price and why it should move in a certain direction.
Regardless of any economic data or other information which is available at the time, a trader will form their own opinion of any given currency or stock, from whatever trade position they took.
This is often called confirmation bias.
Confirmation bias, is the tendency to process information by looking for, or interpreting, information that is consistent with one’s existing beliefs. This biased approach to decision-making is largely unintentional and often results in ignoring inconsistent information.
Confirmation bias is a very dangerous mindset in trading.
Sentiment analysis is often used as a contrarian indicator but the next lesson will go deeper into how to trade sentiment analysis.
In this course, we won't go too deep into fundamental analysis. We only focus on technical and sentiment analysis with a quick overview of the economical data calendar.
