One of the biggest concepts in trading relates to Market Analysis and how to read the markets. This includes both Fundamental analysis and Technical analysis. Experienced traders tend to believe that Market Analysis is solely technical analysis, but that is a misconception. The majority of people believe that they are analysing the market when what they are actually doing is looking at their charts. In fact, 95% of the time, they are looking at different indicators to assess the market instead of the actual pricing and trendlines.
Assess the Fundamentals & Technicals
There is indeed a great debate about which type of analysis is more suitable for traders. In order to be able to analyse the Fundamentals, including central banks & economic data, first of all you need to understand them.
Technical Analysis
- Definition: Forecast price movements using chart patterns
- Date considered: Price action
- Time horizon: Short, medium & long term
- Skillset required: Chart analysis
- Fundamental Analysis
- Definition: Various economic data used to establish value
- Date considered: Inflation, interest rates etc
- Time horizon: Medium & long term
- Skillset required: Economics & statistical analysis
What is Fundamental Analysis?
Fundamental analysis refers to assessing the economic status of a country and to a greater extent, its currency. It does not involve currency price movements though. Instead, fundamental forex traders will make use of data points to specify the power of a particular currency. A fundamental forex trader will also analyse the country’s inflation, balance of trades, domestic products, growth in jobs and even their central bank’s interest rate.
In the finance world, fundamental analysis plays a key role in the valuation of either corporate stocks or real estate. Currency traders can use fundamental analysis as a primary mechanism to examine the support of any possible fluctuations in exchange rates.
What is Technical Analysis?
Technical analysis refers to pattern recognition on a price chart. Technical traders seek price patterns including triangles, flags, or double bottoms. Depending on the pattern, a trader will determine the entry and exit points. Not very similar to fundamental traders, technical traders are not worried about why something is moving because they use the trends and patterns on the charts as their signals.
Technical traders usually set a stop loss at the most recent and lowest price and wait for the market to produce higher highs and lows before placing the long trade. A technical forex trader will examine the price action, trend, support and resistance levels found on the chart. Many of the patterns used in technical analysis of the foreign exchange markets can be applied to similar markets as well.
What is more, traders use indicators and oscillators which are added to a price chart when analysing the forex markets. Moving averages, such as Bollinger Bands, MACD, Relative Strength Index (RSI), and stochastic are some of the most frequently used tools in a technical traders strategy. These are usually chosen by technical traders because they are easy to use and give traders transparent signals.
Technical vs Fundamental analysis in forex: final thoughts
Fundamental and technical analysis have very different techniques and approaches to forex trading. They both offer unique value and insights to support trading decisions as well as information on when to enter or exit a trade. Some traders prefer to use these types of analysis separately depending on their personal trading style and expectation, while others use a combination of the two. There are multiple advantages when combining fundamental and technical analysis.
