Merging Technical And Fundamental Analysis
There are two schools of thought when it comes to trading. Technical or fundamental analysis. The good news is that it is possible and profitable to do so when trading binary options.
Which analysis is better
What do you think is better for binary options trading - technical, fundamental or a combination of both types of analysis? It is without a doubt that binary options is all about the short term and short term trading is about the charts. This means that technical analysis is the preferred method for many traders.
Of course some traders like to use news events to signal trades and this is rooted in fundamental analysis. What I have come to realize over many years of trading is the technicals and the fundamentals are one and the same.
Think about it like this. The charts represent all that is known by the market and that knowledge is represented in price action; what the market knows is the fundamentals and how they are affected by news and other market moving events, so what the charts are showing is the fundamentals affected by news and other events.
Understanding trends is key to making money from the market. Technical analysis is the measurement of trends, trends are defined by fundamentals and trading is using that knowledge to make money. From this point of view I think it easy to see just how important the combination of the two can be.
I myself have come to enjoy the fundamentals. I watch the news and track economic data, central banks activity, geopolitical events, business news and earnings in order to get a sense of the fundamental trends. I don't sit around crunching numbers, keeping elaborate tables or reading economic minutia, all I do is watch the news and keep up with what is going on in the world.
What this gives me is two things, a greater awareness of the world and and a firm foundation for my technical analysis. I know when economic trends are rising, stable or falling and I use that knowledge to confirm or refute what I see on the charts. I have a good idea of when good news is good news and when good news is bad news, or when bad news is good news.
I can see when near term events are affecting long term trends and now use that knowledge in my every day trading. Remember, most technical indicators can and will give signals in either direction, buy or sell, irrespective of the underlying trends. It is our job as traders to understand those trends so that we can make well informed speculations on market movement.
Understanding the trends is an important step in risk management as well. Trend following strategies can weed out at 50% of signals generated by technical indicators, if not more. Fundamental conditions can mean all the difference between anticipating a break above resistance, consolidation and market reversal.
Not only that, having an firm grasp on economic trends and upcoming economic events can give you an edge over the market as they can often have a significant impact on price action. For instance, an upcoming FOMC or ECB along with past events and current expectations can have significant influence on the EUR/USD, and this knowledge will shown on the charts.
You can use the technical signal to confirm fundamental expectations and vice versa.