Education

Correlating technical and fundamental analysis

Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we have mentioned, technical analysis looks at the price movement of a price and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals.

  • Fundamental analysts use financial and economic statements to predict the next movement of the price. This may be too simple explanation, but for the purpose of the course, it holds absolutely true.
  • Technical traders, on the other hand, believe there is no reason to analyze a cryptocurrency fundamentals because these are all accounted for in its historical movements. Technicians believe that all the information they need about a stock can be found in its charts.

However, these statements are contradictory. We support the opinion that both types of analysis are highly correlated with one another and feel safe to assume following statements can be applied to this correlation.

  1. There is always force behind any movement of the price. This force may be technical and fundamental to the equal extent , but there is no situation when the movement is driven by a only one of the mentioned forces.
  2. Strong fundamental factors can completely negate  the importance of technical data. In many cases, when the fundamental factors are stronger than technical ones, markets may move without paying much attention to the data provided by indicators and charts. It happens during highly volatile fundamental events like Non-Farm payroll and Federal Open Market Committee meetings.
  3. Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a time frame of minutes, hours, days and weeks, fundamental analysis takes much longer periods into consideration. However, when it comes bitcoin and other cryptocurrency trading, we concentrate more attention on the routine events ( like ICO or new Blockchain development) which give better idea as to where the price of cryptocurrency will head next
  4. Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of Bitcoin or other cryptocurrency are usually different for each approach. In general, technical analysis is used for making profit on shorter term market movements, whereas fundamental analysis is used to make long term-investments. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell  at a greater price. The line between long and short-term investment can be blurry, but it does characterize a difference between the two schools.

Can They Co-Exist?

Although technical analysis and fundamental analysis are seen by many as polar opposites – the fire and ice of investing- many market participants have experienced great success by combining the two. For example, some fundamental analysts use technical analysis techniques to figure out the best time to enter into trade. Oftentimes, this situation occurs when the asset is severely oversold.

Alternatively, some traders are  looking at the technical to add strength to the signal. For example, if a sell signal is given through technical patterns and indicators, a technical trader might look to reaffirm his or her decision by looking at some key fundamental data. Oftentimes, having both the fundamentals and technicals on your side can provide the best-case scenario for a trade.