In spread betting, traders who open a position without using either fundamental or technical analysis might be considered the equivalent of the pedestrian who crosses the road without looking both ways.
Spread betting is risky. Why make it more so?
Technical analysis and fundamental analysis in their essence are ways of using the information available to you to forecast (and subsequently place a spread bet on) whether the market price in question is about to rise or fall.
Whilst similar in terms of purpose, Finspreads explains here why fundamental and technical analysis are actually quite different.
Fundamental Analysis
Ultimately, a fundamental spread bettor would base a spread bet on news events to which they believe the market in question will react. This approach is not restricted to financial results and economic news, and can include everything from weather forecasts to political developments.
For instance, if Britain was set for a heat wave, a fundamental spread bettor might expect an ice cream company's price to rise. Conversely, if Britain was facing a dairy scandal, a fundamental spread bettor might expect the ice cream company’s price to fall.
This method of spread trading requires up-to-the-minute knowledge of relevant news information, not to mention a firm understanding of the knock-on effects of various industry scenarios. Even then, fundamental spread betting is not flawless, as there are so many factors that affect the markets that cannot be taken into account with the analysis, so risk management is vital.
Technical Analysis
Technical analysis in financial spread trading is based purely on spotting trends in past data, such as previous prices and trading volume.
Because it is based on statistics, it lends itself to charting and works for spread betting timeframes of all lengths, making it popular with the increasing number of day traders who spread bet on minute-to-minute market movements.
Technical spread bettors generally believe that all the information they need on a market is built into price movements. This negates the need for any financial reports, economic news or other fundamental information as, from a technical analysis perspective, these are all already reflected in the price.
In sharp contrast to fundamental analysis, which can be time-consuming, technical analysis can whittle down one’s options within minutes. It can also assist stop loss and limit order decisions.
The major disadvantage though is obvious: technical analysis is based on what has happened, not what is going to happen or even what is happening.
Combined Spread Betting Analysis
There is also a third option for analysing the spread betting markets.
Fundamental and technical analysis can actually be used together, combining current events with historical form, although it is more common for a spread bettor to select one over the other.
Spread trading carries a high level of risk to your capital with the possibility of losing more than your initial investment and may not be suitable for all investors. Ensure you fully understand the risks involved and seek independent advice if necessary.
Article provided / approved by Finspreads which is a trading name of City Index Limited ('CI'), which is a spread trading and contracts for difference ('CFD') provider. CI is authorised and regulated by the Financial Services Authority, Firm Reference Number 113942.
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'Technical Analysis v Fundamental Analysis' edited by DB, updated 29-Nov-10
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Risk Warning:
Please note that spread betting and CFD trading carry a high level of risk to your capital. You can lose more than your initial deposit. These products may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
* Tax law is subject to change or may differ if you pay tax in a jurisdiction other than the UK.
