Technical vs. fundamental analysis

Every new binary options trader is confronted with a seemingly difficult choice: He can either base his trading strategy on fundamental analysis or on technical analysis.

While it seems easier and more natural for beginners to prefer fundamental analysis, you can never become a successful binary options trader with this choice. This article will explain to you the differences between technical and fundamental analysis, and why you have to chose technical analysis if you want to become a successful binary options trader.

The difference between technical and fundamental analysis

While technical analysis studies market action to predict future price movements, fundamental analysis concentrates on the economic forces of supply and demand to influence the price. Fundamental analysis tries to examine all the factors influencing an asset to determine the asset’s intrinsic value. The intrinsic value is the true worth of an asset. According to fundamental theory, if an asset’s current price is higher than its intrinsic value, it is overpriced. If an asset’s current price is below its intrinsic value, it should be bought.

In short, fundamental analysts study the cause of market movements, technical analysts study their effect. The technician does not care about the cause. In his mind, the effect is all he needs to know, and the cause is not important.

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While most traders classify themselves either as technical or fundamental analysts, in reality, the line between both techniques is blurry. Most traders have a working knowledge of both techniques. Still, most of the time technical and fundamental analyses seem to conflict each other.

Especially during a change of trend direction, fundamental analysis cannot explain the reason for the market’s movement. Many bull and bear markets started with little to no change in fundamentals. By the time fundamentals started to change, the trend reflecting these changes was already well established.

One possible explanation for the differences in technical and fundamental analysis is that market prices lead the known fundamentals. In other words, the known fundamentals have already influenced the price and are now included within it. Therefore, the market reacts to fundamentally unknown factors: Anticipations, predictions, and feelings about the future. An impending military crisis, for example, can hurt the fundamentals after some time. The market, however, will likely anticipate these effects and start reacting to the crisis long before it can influence the fundamentals.

Therefore, traders using technical analysis are comfortable with investing based on market movements that seem to contradict conventional wisdom. They do not question the market, and they believe it knows more than the fundamental analysts. In their mind, all fundamental facts are already represented within the price of an asset, which makes technical analysis the superior technique.

Which technique to use with binary options

Most new traders do not know the difference between technical and fundamental analysis. Since they have heard analysts on TV talk about the relation between fundamental influences and a stock’s price, they start investing in rising prices of companies with good earnings reports. Most of the time, the market does not reflect this connection. Therefore, these traders are in deep trouble. They lose money and do not understand why. Somehow there seems to be no connection between what they know and what the market does.

As a binary options trader, you have to invest in fast paced environment. Fundamental analysis is too slow to generate valid predictions for binary options. While binary options work with expiration dates of under a few days, sometime only 30 or 60 seconds, predictions made by fundamental analysis are only valid on a timescale of years.

To become a successful binary options trader, you have to master technical analysis. Fundamental analysis, on the hand, is completely unimportant to binary options.