Combining Technical Analysis with Fundamental Analysis

Technical and fundamental analysis are two principal disciplines when investing in markets, but they are on opposite sides of the spectrum. Therefore, investors want to know if technical analysis can be an effective alternative to fundamental analysis.

Although there is no final answer to this query, there is little doubt about combining the strengths of both these techniques to help investors better appreciate the market and speculate the direction in which their investments might be heading.

In this discussion, let’s take a look at which elements of technical analysis work well with fundamental analysis and also discuss some of the drawbacks of combining technical analysis with fundamental analysis.

Which Technical Analysis Elements Work Well with Fundamental Analysis?

Pursuing Feedbacks Over Time

Many fundamental experts will look at a graph of a certain market, stock, or index to conclude how that item has done over time and when specific kinds of news such as financial data or positive earnings will be released.

Trends have an affinity of repeating themselves, and the traders who were tempted or put off by the news in question happen to respond in a similar way over time.

For instance, if you look at the graphs of housing stocks, most of the time, you’ll note that they respond negatively when the US Federal Reserve decides to waive a portion of the interest rates. Also, interior fittings stores are affected when sales of new and existing homes drop.

Volume Patterns

When an investor or analyst studies stocks, it’s always good to hear what other analysts think about the stock. Maybe they might have gotten some extra information about the company, or they could be creating a pattern.

One of the most common means of judging market sentiment is to focus on the freshly traded volume. Massive trades imply that the stock has gotten a lot of attention from the trading industry, and the shares are either under accrual or circulation.

Pursuing Short-Term Movements

Although a majority of fundamental traders happen to focus on the long-term, odds are that they still need to get a favorable entry price or a favorable exit price after they stop holding a position. Technical analysis can come in very handy in such scenarios.

More precisely, when a stock breaks its 20 or 30-day moving average (MA) either up or down, it normally proceeds along that pattern for some time. In layman’s terms, it’s mainly an illustration of what to expect in the imminent period.

Also, 50 and 200-day MAs are typically used by some fundamental traders and chartists to conclude long-term breakout trends. For investors looking for the opportune moment to trade or set a favorable entry or exit price, these kinds of analyses are vital.

What Are the Drawbacks of Combing Technical and Fundamental Analysis?

Technical analysis can give an incorrect perspective because:

There is Bias

When it comes to examining a chart, a certain level of bias comes into play. For instance, some people may see a chart and presume that the stock is stalling, while others might see this and decide that there is an immense loss to follow.

So who is correct? There is no definitive answer because there’s no computation that can be done to settle this argument, as is the case in fundamental analysis. In charting, only time will reveal the direction in which markets move.

History

Although it’s possible to predict some changes based on trends or when a certain stock breaks past a significant moving average, charts usually don’t forecast future positive or negative fundamental information. Instead, they are mainly focused on the past.

For instance, if word gets out that a company is about to release outstanding quarterly earnings, investors might be able to exploit this prospect, and the good news will be evident in the chart. A basic chart cannot give an investor vital long-term fundamental data such as the imminent direction of price per share or cash flow.

Charts Don’t Constantly Predict Macro Trends

Charts are generally incapable of predicting macroeconomic patterns accurately. For instance, it’s almost impossible to look at a key figure in the oil and gas industry and conclusively tell whether OPEC plans to amplify the quantity of oil its producing.

Final Thought

All in all, there is no conclusive response as to whether technical analysis can be used as an alternative to fundamental analysis. However, most analysts agree that it has its benefits when used to complement rather than replace fundamental analysis.

Moving Averages for Smoothing Time Series Data

Moving averages or MAs are useful for smoothing time series data, unearth underlying trends and determine components used in statistical modeling. Smoothing refers to eliminating random variations that might appear as roughness in a raw time series data plot. It minimizes the noise to enhance a signal that may show cycles and trends. Analysts also know the smoothing process as filtering the data.

MA was developed in the 1920s and is the oldest known process used for smoothing data today. The method depends on the idea that observations that are close in time are more likely to have similarities in values. The averaging eliminates the noise of random variation from the data.

Time Series Forecasting

Forecasting via time series uses data using historical values and related patterns to predict any future activity. This is mostly related to trend analysis, cyclical fluctuation analysis, and seasonality. Success is not a guarantee with this method as with any forecasting technique.

Components of Time Series

The things affecting an observation’s values in a time series are its components. They include:

  • Trend
  • Seasonal and cyclic variations
  • Random movements
  1. Trend

The trend indicates the general data tendency to decrease or increase over a long period. A trend is a smooth, average, and long-term tendency. It is not absolute that the decrease or increase is in one direction over the given time frame. A tendency may decrease, increase, or stay stable in different time frames. However, the overall trend must be either stable, downward, or upward.

2.    Seasonal and cyclic variations

Seasonal and Cyclic Variations are defined as periodic or short-term fluctuations.

3.    Random Movements

Some movements are irregular and random. They are uncontrollable, unexpected, and erratic.

How to Analyze Time Series Data

You can use statistical techniques to analyze time series data in two ways. One is for generating inferences on how variables affect other variables on interest over a period and how to forecast any future trends.

What are Moving Averages?

Moving averages or MAs are a series of averages that are calculated via sequential data point segments on a series of values. Their length defines the data points that you should include in each average.

·         One-Sided MAs

One-sided MAs are inclusive of both the current and previous observations per average

·         Centered MAs

Centered MAs include the previous and future observations and calculate the average at a particular point in time. The centered MAs use observations surrounding it in both directions and are also referred to as two-sided MAs.

Centered intervals pan out evenly for odd observation numbers as they allow an even number of observations before and after the MA. If you have an even length, the calculations adjust and vary by using a weighted MA.

How Moving Averages Reveal Trends

MAs can eliminate seasonal patterns and reveal any underlying trends. If you need to eliminate seasonal data in your data, you must set the length of your MA to be equal to the length of the pattern. If you don’t have any seasonal data, select a reasonable length. The longer the length, the smoother the lines. Seasonal data in this context has nothing to do with literal seasons. It refers to a repetitive pattern in your data with a fixed length.

The downside to using MAs to smooth data series is that these calculations rely on historical data. This reliance on historical data means the timeliness of the variables is lost. This is one reason why you should use a weighted MA as the variable’s current values are accorded more importance.

Data Expectations

Calculating an MA of a time series makes some data assumptions. It assumes that both the seasonal and trend components have been eliminated from the time series. This makes your time series static and does not indicate any obvious trends such as decreased movement or seasonality.

You can use various methods to eliminate seasonality and trends from time series data when you are forecasting. Two of the best methods are the differencing method, modeling the behavior and removing it from the series.

Moving Average as a Data Preparation Technique

MA can be used as a data preparation method for creating smoothed versions of the original data. Smoothing helps to minimize the random variations and expose the underlying process’s structure.

Conclusion

You can use moving averages for smoothing time series data or eliminating random variations to give a smoother data plot. This smoothing process is also known as filtering and is a useful way of revealing underlying market trends.

How Scalping Technique is Reshaping Forex Trading

Forex scalping is a forex trading technique where a forex trader participates in vast trade niches to consolidate the different profits earned.

It allows a trader to risk on many forex trade pairs thereby increasing chances of widening the profit base. Forex scalping has both pros and cons and is completely dependent on what the forex trader aspires.

This article attempts to look at various facets of forex scalping to fully understand the underlying concepts.

Merits of Forex Scalping

Widened Profit Base

Forex scalping allows a trader to increase his or her profit base. This allows a trader to focus on diverse trading niches without specifically narrowing it down to a single trade pattern.

It allows a trader to rely on varied chances instead of setting dependence on s single trade. Traders who participate in forex scalping take high-risk chances, unlike specific traders. With a good stop-loss order, a trader can maximize his profits in forex scalping compared to other forex strategies.

Higher Profit Chances

Forex scalping allows a trader to reap big from wins generated on various niches. With diversification, the likeliness of a forex trader reaping immensely is increased.

Forex scalping is more likely to favor a forex trader because trading is always volatile. This means that out of the set trading markets a trader invests in he or she is assured of some profits in the long run.

Capitalization

A forex trader is able to capitalize on finances created from high liquidity and volatility levels. Capitalization is important to a trader because forex trading moves out quickly in a set bar from initial to completion stages.

The rapid trade movements mean that a forex trader is able to capitalize on the trades and make high returns.

Low Loss Risk

Forex scalping has low-risk chances. This is possible due to the breakdown of trade to segments that are independent of each other. Even if losses are generated on some trades, in the long run the forex trader has high chances of reaping profits from forex scalping.

Demerits of Forex Scalping

Just like any other forex strategy, scalping has several disadvantages associated with it. The most common disadvantage of forex scalping includes

Diverse Information

Because forex scalping is a technique that involves short margins trades, a forex trader needs to fully understand the timings to place the trades. Failure to understand the underlying trading information can lead to disastrous losses.

Forex scalping trading relies on sharp volatilities that are common on major currency pairs. For example, during major financial announcements, a nation’s currency might quickly flop or rise for short periods before stabilizing.

These are requirement trading points where forex scalping can be applied. When a wrong interpretation is made on the financial-economic ripple effect based on the major announcements huge losses could result.

Short Timeliness

Forex scalping is suited for traders who invest shortly on trades and pull out of it. This means that a trader can suffer setbacks associated with failure to find diverse information to trade.

In most scenarios, the trader does not use various technical indicators to make judgments because of time limitations. This could result in devastating losses most of the time.

The short timeliness prompts forex traders to use high stakes when pitching up on the trade pips with aim of making profits. In the long run, making losses on the high stakes can be detrimental to the forex trader.

Cumulative Trading

Forex scalping requires that the trader be always on the watch out to invest. Additionally, in order to maximize the profits, the trade uses profits earned to invest on more volatilities and trade pips.

In the long run, the time breakdown can be emotionally stressful to the trader because it requires a trader’s complete timely involvement over time. The final profit in forex scalping is mainly calculated after the timely breakdowns are over.

Forex scalping because of the volatility levels means that a trader cannot be on the trading sphere for a long time. This calls for keen trading chart analysis.

Conclusion

Forex scalping has both pros and cons. Its prevalence depends on the forex trader’s choices. It is equally important to understand the timing variations in order to fully utilize forex scalping.

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