If there would be a SWOT analysis between the technical and fundamental analysis, what factors should be taken into consideration? Is it difficult for such an analysis to be made in the first place? Let’s try to see the strengths, weaknesses, opportunities and threats of both and what kind of a conclusion can be drawn.
Some say technical analysis is a science, others that it is an art. Well, whatever it is, it does have the following advantages/strengths:
- allows the trader to have his/her own setup with clear entry and exit levels;
- easy to spot important levels of supply and demand, based on former support/resistance areas;
it deals with strategies/theories that have clear rules regarding what factors to take into consideration (for example the Elliott Waves Theory gives an exact set of rules for each and every wave/pattern to be met under the theory – impulsive moves, leading and ending diagonals, contracting and expanding triangles, zigzags, flats, wedges, etc);
On the other hand, fundamental analysis comes with one of the biggest advantages of them all: volatility. And this one sometimes compensate for all the hard work in setting up a nice scenario based on your technical analysis. Sometimes all it needs for your target based on a technical analysis approach to be met is thirty seconds after a fundamental/economic news was release.
Under the weaknesses category, for technical analysis we can count exactly the fact that it is too rigid and allows less flexibility for a trader. I mean you can have a stop loss, and sometimes even a stop and reverse order, when a trader thinks market may change based on his/her analysis, but this approach shows exactly the lack of flexibility technical analysis has. As for the fundamental analysis, the most important weakness comes from exactly the same place like the strength comes: volatility. In this world dominated by algo’s that are trading based on the interpretation of the economic data, sometimes the initial reaction the market has it’s not the right one as fake moves are ordinary. And this comes out of extreme levels of volatility.
One of he most important opportunity technical analysis is given by the fact that the setups one makes based on it allows a trader to look for nice risk/reward ratios and this is a goal every trader aspires to met. The higher the rr ratio, the better. It is a saying that one should never take a trade with a rr ratio less than 1:3, but this depends very much on the type of trader: scalper, swinger, investor, etc. So a trader can play with different scenarios, currency pairs, financial instruments, until identifying the right setup that allows for a nice rr ratio.
Fundamental analysis comes with the fact that it allows traders, and mainly scalpers (traders that are looking for a quick profit and have as many entries into the market as possible on the intra day basis) to have multiple entries on the same pair based on the volatility offered by the time economic news/releases/data are coming to the market.
The biggest threat that comes when trading is to try to disregard one of the two, as analyzing a market without taking into consideration both of them simply does not allow a trader to have the optimal decision about the respective market. So the threat is that your analysis ends up being incomplete and they both need to be looked upon when trading.