As a spread bettor, CFD or forex trader, it’s important to have a trading strategy that helps you identify profitable trades, maximise your profits, and cut your losses when a trade goes against you.
Technical analysis and fundamental analysis are two common trading techniques used by many traders to analyse and trade the financial markets.
Technical analysts look at historical price data to forecast where price trends may move in the future and attempt to speculate on these forecasts. Fundamental analysts, on the other hand, look for a more rigid assessment of the core underlying factors that affect demand for an asset.
Most traders tend to categorise themselves into one of the three areas below when determining their trading strategies:
Technical analysis has risen strongly in popularity over the last five years and is actively used by traders to spot possible future price trends using a multitude of charting tools and historical data.
One of the key beliefs of technical analysts is that history is likely to repeat itself.
Using hard stop losses is an extremely important aspect of risk management as it allows you to clearly define your risk for every trade. Stop losses should be placed according to market conditions and should strike a balance between being too close to the market price and too far.
For example, for those choosing to trade forex – let’s say that the price of the EUR/USD historically saw traders selling when prices neared the $1.5000 level (commonly referred to as a resistance level). Technicians, or technical analysts, would use this historical trend to forecast that prices could face selling pressure when they near the $1.5000 mark, and might decide to sell EUR/USD if prices get near to $1.5000.
When looking at historical price trends through charts, most technical analysts would typically have three key expectations in mind:
Find out more about the main tools used in technical analysis