Introduction:
A trend trader follows the trend and doesn’t take trades against it, making trend analysis vital to trend trading success. While some traders base their strategies almost exclusively on technical analysis, others prefer using fundamental analysis as the basis of their trading decisions.
Which approach is more successful? In this article, we’ll cover the advantages and disadvantages of each method to help you decide which one would be better suited to your particular trading style and personality.
Technical analysts rely on prices alone
they use charts, graphs, and models to predict future prices. The key assumption underlying technical analysis is that markets have already factored in all of the relevant fundamental information regarding a company’s financial performance. Technical analysts argue that there are patterns in stock price movements that repeat themselves; they believe these patterns make it possible to forecast future market movements with a high degree of accuracy based on past performance.
Technicians will study a stock’s trading volume, price, and volatility to determine trends and momentum in its price movement. Then, technicians will use mathematical formulas to identify when one trend changes into another trend (for example, predicting whether stocks will rise or fall based on past price action). Once technicians have made their predictions, they can take positions that attempt to profit from those predictions.
Trend traders also use fundamentals to determine the direction of price action
Is a market supported by bullish fundamentals, or do bearish fundamentals warrant further weakness? Even though trends are inherently technical in nature, they are usually helped along by solid fundamental factors. These two elements combined (fundamentals and price action) form what traders refer to as trend confirmation. While some believe that fundamentals always drive markets (this has been true in certain instances, such as during periods of peak central bank intervention), others maintain that markets move independently of fundamental drivers.
At times like these, trend traders will simply look at price action to determine if there's value in entering a position. Ultimately, whichever strategy you use when trading futures contracts—whether technical analysis or fundamental analysis—the most important factor remains to recognize where and when opportunities arise so you can take full advantage of them.
Identifying key levels and pivot points
Knowing where to look for support and resistance levels will save you time by not having to constantly re-analyze certain assets. For example, if Apple (AAPL) has a key support level at $200, it’s probably safe to assume that if AAPL drops below $200 (on high volume), there’s likely an increased chance that it will rebound; conversely, if AAPL fails to breach $200 on significant volume, you might start looking at how much further it can go down.
Identifying these levels allows you to set better trades and adjust your strategy as needed based on how prices change when those levels are hit. In addition, knowing where price pivots occur is crucial in identifying potential trend changes. For example, if the price breaks above a major pivot point of $100 on heavy volume, you could expect that trend to continue. If the price drops below a major pivot point of $100 on heavy volume, however, you could expect some type of reversal to occur.
Watch trends develop over time
Technical analysis, it’s all about watching trends develop over time and acting accordingly. With fundamental analysis, it’s more about making educated predictions based on a company’s market value, revenue growth, expenses, and more.
If you’re looking to buy stocks with real potential for growth, you might want to take a fundamental approach; on the other hand, if you want to capitalize on ups and downs in specific markets that appear likely to shift in one direction (whether up or down), a technical approach may be more useful. Either way, though, trend traders will need to keep an eye on both types of analysis.
Knowing what to do with divergences
When an oscillator (or any trading tool) gives a buy signal but prices move lower, that's a divergence, and it can have serious implications for your trend trading strategy. Let's take a look at how to use divergences in our trend-trading strategies. This often-overlooked indicator can give you great insight into developing market trends. If you're not using divergences in your analysis yet, it's time to start paying attention to them!
When an oscillator (or any trading tool) gives a buy signal but prices move lower, that's a divergence, and it can have serious implications for your trend trading strategy. Let's take a look at how to use divergences in our trend-trading strategies. This often-overlooked indicator can give you great insight into developing market trends. If you're not using divergences in your analysis yet, it's time to start paying attention to them!
Find out where buyers and sellers are coming from.
It sounds cliché, but technical analysis and support, ort, and resistance levels are crucial tools that every trader should be well-versed in. Support and resistance levels are important price points at which buying and selling interests have a tendency to meet. Once you’ve figured out where these key price points are, you can use technical analysis to predict how far prices might go before buyers and sellers overwhelm each other. When it comes to trend trading, knowing where buyers and sellers might meet is more important than any fundamental analysis. The big players don’t want to buy unless they think they can sell at a higher price.
And they don’t want to sell unless they think they can buy back lower. They will only trade with people who agree with them—which means that if you understand where they’re coming from, you can make money by anticipating their moves. If there aren't enough willing buyers or sellers (or both) on one side of an asset's current market value, then prices will either reverse course until there are enough interested parties on both sides—or remain dormant until someone changes their mind about valuations and gets into action again. A large group of participants doesn't guarantee higher volatility—but neither does it necessarily mean stability!
Conclusion
So after seeing all of these benefits, you may be asking yourself why technical analysis is more popular than fundamental analysis. There are a couple reasons for that. The first reason has to do with how each type of analysis works. With technical analysis, you look at recent data to make your investment decisions, whereas, with fundamental analysis, you look at factors like growth rates and cash flotation to determine whether or not an investment is worth it.
Most people think that they should invest in companies with good fundamentals rather than those who have performed well recently on high volume. What most don’t realize though is that investing based on what looks good today could lead them down a path of even bigger losses tomorrow.
