LONDON, January 20, 2012 /PRNewswire/ --

Do you use charts and statistics to forecast future price movements or do you rely on social and economic news to influence your trading strategies? City Index (http://www.cityindex.co.uk/) examines the tools and factors behind technical and fundamental analysis, the two most popular forms of analysis used by traders to develop their trading strategies.

Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest the direction of future price activity. Meanwhile fundamental analysts focus on factors such as economic data, political aspects etc that may affect a company's actual business and its future prospects, thus impacting its share price.

However, while many traders will often favour one form of analysis over another, both can be essential to creating a carefully considered strategy for placing spread bets and trading CFDs.

Technical Analysis

Technical analysis uses a range of tools and factors to analyse market prices including charting, time frames and technical indicators to identify trends and forecast potential market movements. This form of analysis ignores fundamental factors such as news and economic conditions and is applied only to the price action of the market.

Finding the prevailing trend helps traders to become aware of the general market direction. Daily, weekly, and monthly charts are most ideally suited to identifying the longer-term trend. Once the overall trend is identified, technical traders will usually begin identifying the trend of their chosen trading timeframes.

There are many different types of technical indicators available to traders to help them to make informed trading decisions and can be useful in providing signals for the momentum, divergence and reversal of trends.

Some indicators are useful in trending markets whilst others, referred to as oscillators, can be used in range-bound markets to determine Overbought and Oversold conditions, which can then be used to spot potential price reversals.

There are many ways to use technical indicators and if used sensibly, technical indicators can help you to make better and more supportive trading decisions.

Fundamental Analysis

Unlike Technical Analysis, which looks purely at price action and trends, Fundamental Analysis takes on a much more rigorous assessment of an asset, such as a currency or stock index.

Fundamental analysts look at key elements that are likely to have a bearing on the strength or weakness of a particular currency, stock or share such as economic data, political factors and even the impact of natural disasters. 

Common key indicators include inflation, interest rates, international trade, political situations, fiscal policies and monetary policies.

For instance, positive production and jobs figures indicate a strengthening economy and would therefore imply that the country's currency is likely to appreciate, while negative economic data would indicate growing pressure on stocks and currencies, thus pulling down prices.

For example, the US non-farm payrolls recently surpassed market expectations, with the US unemployment rate hitting its lowest level in nearly three years. This in turn triggered a greater appetite for risk amongst investors, in the hopes of economic recovery while pushing the UK FTSE 100 higher by 0.5% in the minutes immediately following the release of the figures.

Summary

In a nutshell, fundamental analysis could be viewed as examining the structure and location of a house to ascertain its true value, while technical analysis ignores all the market noise such as financial headlines or economic data to focus purely on price action.

In today's fast paced financial markets, finding trading opportunities and utilising chart patterns and technical indicators can be an important aspect for any trader. However it could be difficult to give appropriate weightings to fundamental analysis factors as, while news travels instantly, it is not always possible to act on it instantly.

While some traders prefer to use either Technical Analysis or Fundamental Analysis to develop their trading strategies, others use a combination of both to devise a strategy that best suits their trading needs.

City Index offers you the ability to use powerful tools with a combination of technical indicators and different charting styles to suit your needs across different time frames. The company also provides daily market commentary and videos direct from the trading floor so you have constant access to the tools needed to help you to develop your trading strategies.

Learn more about trading analysis and how to trade at: http://www.cityindex.co.uk/learn-to-trade/

Spread betting and CFD trading are leveraged products which can result in losses greater than your initial deposit. Ensure you fully understand the risks.

About City Index:

Today more and more individual traders are discovering the benefits of derivatives, and many of them are discovering them through a City Index trading platform.

City Index is a leading global provider of margined foreign exchange, CFD trading and in the UK, spread betting. As a group, we transact in excess of 1.5 million trades every month for individuals in over 50 countries worldwide. To learn more visit: http://www.cityindex.co.uk/

SOURCE City Index