Quiz: Do You Rely More on Fundamental or Technical Analysis?
1. How do you usually react when a winning pair is paring its gains?
- I go short. I believe the selling pressure will turn around the price soon
- I go short. If not, I wait and see if it will reverse itself
- I go short. But I also try to see if there's any fundamental news that might cause the price to move up again
💡 The trade lowdown:
A technical analysis trader may use technical tools to confirm that the trend is intact and there is no sign of reversal. If the price keeps moving in your favour, you will see a profit. Your confidence is maintained, and you're willing to sit in your position for longer.
A fundamental trader will assess factors such as political events, economic reports or market expectations to determine whether the price action makes sense given all other information available at that time. If it doesn't make sense, you would exit the trade and look for new opportunities. See the difference between fundamental analysis and technical analysis here.
Not sure what should go into your trading plan? See our example trading plan template>>
2. You notice that the EURUSD has fallen about 10 pips in the last hour, but all major European indices have risen by 1-2%. Which of the following do you do?
- You think there is a chance that EURUSD will reverse its trend and rise soon. You would wait for the price to fall below your entry threshold and then go long on it
- The fundamentals are there - the European indices are up, so you'll be watching the price chart closely for any signs of a reversal and possibly go long
- You think there is a chance that EURUSD will rise soon. But since you're not sure of the reason behind this trend, you would prefer to wait for more confirmation before going long on it
💡 The trade lowdown:
Technical investors look at indicators such as moving averages, stochastic oscillators and support and resistance levels to determine where they should invest their money. For example, if one of the support levels, such as 1.2900, has broken down, a technical investor would believe that the EURUSD will head to 1.2800 next.
On the other hand, a fundamental trader looks into the underlying factors such as economic data releases or central bank decisions to determine where an asset will head next. In our example above, a fundamental trader would believe that any significant upward movement in European indices will be reflected in EURUSD rising later on also. Fundamental analysis might be harder to learn as it requires more research effort, but it can be more profitable over time than technical analysis.
Here's the secret to finding trading strategies to suit your day job>>
3. How do you determine whether the market is overbought or oversold?
- Look at indicators such as stochastic, RSI, MACD and Fibonacci levels
- Monitor divergences and candlesticks for increased probability trades
- Consider price action and volume for increased probability trades
💡 The trade lowdown:
When the market is overbought, technical indicators such as an RSI above 70% can be used to know when it is time to sell. A reading above 70 indicates that an asset is "overbought" and due for a correction; a reading below 30 indicates that it's "oversold" and due for a bounce. Like any other tool, it should be used with other indicators and not treated as a standalone. The fundamental analysis approach to determining overbought/oversold in a market would be to look at the key fundamental factors that affect the supply and demand of currency pairs included in that market.
For example, suppose macroeconomic news prompted investors to liquidate their positions (perhaps due to cause for concern within that economy). In that case, this could cause an increase in demand for USD versus their local currencies. This increased demand from investors would cause an increase in price for USD versus their local currencies, causing the US Dollar index (DXY) to rise. This price increase would indicate that the US Dollar is overbought, and thus it would make sense to sell USD.
Read our ultimate guide to risk management>>
4. A rising wedge is forming on the daily chart. What do you do?
- Look for a breakout by checking charts and other tools
- Use a combination of tools and assess other factors such as momentum and volume
- Assess the long-term trend and wait before any action
💡 The trade lowdown:
The rising wedge is a forex chart pattern that occurs when prices move between three lines on a chart. The pattern forms over time. The upper and lower boundaries are horizontal resistance and support levels, respectively. The converging trend lines form what looks like an upside-down letter "W" on the chart.
A rising wedge can occur during uptrends or downtrends in price. Generally, the pattern is more significant when accompanied by other technical signals. For example, it's a relatively reliable indicator of a reversal in a downtrend if the price breaks out downward from the pattern to the upside. Similarly, it's a strong indicator of an impending upturn if the price breaks out upward from the pattern to signal that it has completed its downside move.
Got your trading resolutions sorted? Read our New Year's Resolutions for Traders>>
5. You have been following a long-term trend and notice that volume has recently fallen off considerably compared with previous sessions. What is your next step before pulling the trigger on this trade opportunity?
- Start looking at the chart, seeing where the price has been and where it is going
- Check the volume, and that price action has been following any trends
- Think again, taking into account market size, news and global events
💡 The trade lowdown:
A sudden drop in volume can mean several different things over the long term, but in the short term, it can suggest that there is not as much interest in the investment as there was previously. This could be because:
- The market is slowing down, and investors are taking profits. The market is due for a correction; hence, traders take some chips off the table before they lose more money. In order to profit from this situation, you need to find out whether the current drop in volume is just a temporary trend or if it's signaling a correction or bear market.
- The market is seeing a short-term blip and is about to resume its long-term uptrend. If this is the case, it's probably best to hold on for now, especially if technical indicators hint at an imminent reversal in trend.
How did you score?
Mostly As: Technical Trader
Your answers indicate that you’re more of a technical trader. You prefer using historical price and volume data to make future predictions about the direction of prices. This includes charts and statistical tools such as moving averages, trend lines and oscillators. Technical analysis can be used in all time frames and is all about charts, price, volume and candle shapes - you’re likely to have a strong data-focused mindset, and a strong trading system. However - a winning trade is often the result of technical analysis and fundamental analysis. Why not check out our page on fundamental analysis?
Mostly Bs: Technicals and Fundamentals
You’re in the perfect position! You’re someone who relies on fundamentals to set up trades, then decides which ones are worth taking based on technicals. Again, you might use both approaches together, depending on the situation at hand. You can probably adapt pretty well no matter what happens in the market - a strategy combining both technical and fundamental data is one that will likely serve you well. Keep going!
Mostly Cs: Fundamental Trader
Your answers indicate that you’re more of a fundamental trader. You prefer evaluating trades by analysing related economic, financial and other qualitative factors. It makes use of both quantitative and qualitative analyses, looking at a security's intrinsic value rather than its price or market capitalisation. Fundamental analysts typically look at financial statements to determine the company's underlying values, its prospects, and the overall "fundamentals" of the company itself. It considers elements such as financial position, growth potential, profit margins, and more. You’re likely to have a strong holistic mindset, and a strong trading system. However - a winning trade is often the result of fundamental analysis and technical analysis. Why not check out our page on technical analysis?