Combining technical and fundamental analysis in trading sessions

What is a trading session?

A trading session refers to the active trading hours for a financial asset. During these hours, traders can place new buy and sell orders on this asset, modify their open positions, or close them.

Trading hours vary by asset classes, such as stocks, commodities, cryptocurrencies, and forex. Some markets stay open for traders almost all the time, while some assets can only be traded during traditional stock exchange hours. For example, the forex market has four major trading sessions, which are Sydney, Tokyo, London, and New York. Cryptocurrencies are typically open 24/7 due to their decentralised nature.

A geographical location will also affects the trading hours because of different time zones and business hours. Major exchanges like NYSE and NASDAQ have core trading sessions aligned with US time zones. Trading sessions can also be shortened or interrupted by market closures on public holidays.

Some financial products can be traded before or after the normal market hours. These are called pre-market and after-hours trading. They allow trades to happen outside regular trading sessions, for example in case of important financial news, but often come with risks, such as low liquidity and large bid-ask spreads.

Spot opportunities with fundamental analysis

Traders use market analysis to spot opportunities on global markets and decide what assets to trade. Fundamental analysts focus on data and factors that drive the value of assets to identify potential profit opportunities.

Fundamental analysis reveals information about the financial state of a company or industry and provides specific details that help to determine a value of an asset. Fundamental analysts believe that the value (and hence the price of an asset) is driven by the state of the economy, factors around the industry that the asset exists, and the asset’s characteristics. Macroeconomic indicators include a wide range of economic activities and conditions and provide valuable insights, making them an essential part of fundamental analysis.

Trajectory of the general prices of goods and services is one key aspect that fundamental analysts will focus on. Economic growth levels can determine the amount of money people have and their ability to spend, hence demand and prices might move as a result. Economic cycles like boom, depression, recession, and recovery times can also influence the performance of specific assets and industries.

For example, during times of economic hardships people tend to cut down luxury products - but the demand for utility and essential goods remains or even increases. This might drive demand for stocks of companies that deal and produce utility products. For stock traders, company fundamentals like earnings, management, and the 10-K report for US companies can forecast possible drivers of future growth or poor performance in prices.

Identify key levels using technical analysis

Technical analysts use historical prices to forecast future price direction, believing that market prices are repetitive and predictable. The factors behind the price changes are usually not a main focus in technical analysis.

This analysis approach is based on the idea that prices are moved by demand and supply forces. Selling activity often indicates an increase in supply while buying shows there is demand in the market. When demand surpasses supply, prices tend to rise, while when supply exceeds demand, prices fall. Monitoring the balance between supply and demand and price patterns can give an idea about the market sentiment and future price movements.

Different types of charts are used to display price patterns, including candlestick and line charts. There are patterns that indicate continuation of trends, reversal of trends, and exhaustion of trends. Technical analysts utilise technical indicators to study various aspects of price movements to get a directional idea.

Combine analytical insights in trading sessions

Understanding how and why the price of a financial asset changes requires using several approaches of market analysis to get a comprehensive view of the market. Technical analysts and fundamental analysts aim to maximise the outcome of their trades by targeting big price movements and changes in value. Both analysis styles have their strengths and weaknesses, and that’s why traders can benefit from combining them.

Let’s look at a couple of examples of how traders can use both approaches to identify opportunities and find the ideal moment to enter the market.

Consider a trader is looking at the technology sector, influenced by emerging trends in artificial intelligence (AI). They begin by analysing fundamental factors such as growth forecasts for the AI industry, earnings potential of leading tech companies, and regulatory developments. Upon identifying a fundamentally strong company poised for growth, the trader then turns to technical analysis. Let's take Nvidia as an example and imagine that the company’s stock price is approaching the Fibonacci retracement level of 50%, signalling a potential bullish rebound. The trader also notes that the stock is approaching a key support level, with the RSI indicating it's oversold - a prime buying opportunity.

Combining these insights, the trader decides to enter a long position, setting a stop loss order just below the support level to minimise potential losses and a take profit order at a resistance level identified on the chart. This strategy encapsulates the power of combining fundamental and technical analysis, offering a balanced and informed approach to trading.

In another example, let’s consider a scenario where a trader focusses on the Federal Open Market Committee (FOMC) meeting, with gold as their asset of choice. Should the Federal Reserve opt to maintain interest rates, adopting a dovish tone, it might forecast a depreciation of the dollar. Concurrently, if gold were to breach the confines of its descending wedge pattern, this technical signal could suggest an impending ascent in its value. Here, the trader benefits from a dual analysis - a confluence of macroeconomic and technical indicators pointing towards a potential rally in gold prices.

Trading decisions executed at the well-selected times within a trading session can also produce a more desirable outcome. A high level of trading activity drives high demand or supply based on the dominant direction of the asset traded. Trade positions should be entered when there is enough participation and volume to support the directional bias identified. Therefore, in addition to conducting market analysis, traders should monitor the activity and actions of other traders to understand the market sentiment and make more educated decisions.

These examples do not constitute financial advice and are intended only to provide a simplified example of how different analysis methods can be used together. We recommend to always test trading strategies on a risk-free trading demo before investing your capital.