The fast-paced nature of CFD trading tends to propel traders towards using technical analysis techniques to determine when to buy and sell, but this could be a flawed strategy. While technical analysis per se isn’t bad, combining technical and fundamental analysis is often a better approach.
If there is a technical signal to buy, it’s good to know that there’s a fundamental reason behind it. Understanding the fundamentals of a stock – such as the market’s expectations, analyst recommendations and the like – can give you an edge over other traders.
For those unsure of the difference between the two approaches to CFD trading, technical analysis studies prices and volume by using charts, whereas fundamental analysis is more concerned about whether a stock is a sound company to buy. Both approaches are by no means flawless, so combining elements of each can reduce the chance of making a wrong call.
Fundamental analysis takes into account economic releases, events such as political elections as well as individual company announcements. Traders who employ fundamental analysis to trade CFDs will often use analyst recommendations to punt on the price direction of stocks, whereas technical analysts hone in on the trend of the share.
Technical analysts will often cite the futility of using fundamental analysis alone – or analyst buy recommendations – as a tool to trade CFDs, by highlighting that HIH and One Tel were at one time tagged as stocks to buy; not long afterwards, they were delisted from the stock exchange. Accordingly, enthusiasts of technical analysis say that the charts had spelled danger for these stocks way in advance, possibly pointing to the benefit of not relying purely on one method of analysis but instead combining chart analysis with fundamental research.