Fundamental Analysis Vs. Technical Analysis
What is Fundamental Analysis?
As contained in this article Fundamental Analysis Vs. Technical Analysis: 2 Major Myths & Solution. Fundamental analysis involves analyzing the economic data, social or political reports, and news events that may affect currency prices. In forex, different currencies are paired together uniquely for trading. The currency exchange rate determines the price of each currency pair in the forex market.
If a country’s economy is looming, its currency weakens and if a country’s economy is booming, its currency strengthens. A good economy means higher currency value and a bad economy means lower currency value.
Generally, News and other economic data play a major role in the direction of the price. When a country’s economy experiences high-interest rates, this generates an increase in demand for that currency pair. I have discussed major news events in my previous post.
Importance of Fundamental Analysis
1. Fundamental Analysis explains price movement – Major economic/ political news and data reports quickly move the direction of price in a particular direction. Economic news released unexpectedly has proven to divert the direction of price in a particular way favoring the current news.
2. Fundamental Analysis is long-term focused – It gives a long-term view of a particular currency and this plays out in the forex market pretty well. Data values are compared from time to time with each economic news released, either daily, weekly, monthly, or yearly
3. Fundamental Analysis places value on currency – Every trader in the forex market looks out for a currency value before its being traded. Only fundamental analysis provides the actual value of a currency asset by studying the country’s inflation rate, interest rates, industrial production, and other economic factors.
What is Technical Analysis?
Technical analysis involves analyzing forex market price history with the use of charts for identifying market trends and/or directions.
3 Tenets of Technical Analysis & Solution
1. Price reflects everything – Price alleviates unnecessary fears and panic in the forex market. Technical analysts understand that the current price reflects all known information available to both buyers and sellers in the market. Newmarket information is aligned with the past information available in the market.
2. Price moves in obvious trends – It is easily observed by a professionally trained eye the trends available in the current or past market. A trend can either be upwards, downwards or sideways. The upward trends consist of higher highs and higher lows while the downward trends comprise lower highs and lower lows.
3. History often repeats itself – The forex market is repetitive and algorithmic in characteristics within its price data. However, no two candlestick or chart patterns in price history completely repeat themselves, there will always be little differences to make each pattern unique in its way.
Importance of Technical Analysis
1. Technical Analysis applies to all timeframes – Technical Analysis can be applied by day traders, swing traders, or position traders in the forex market.
2. Technical Analysis can tell the trend of the market– Technical tools are used to analyze the trend of the market as a Technical Analyst. These tools are moving average (MA), support and resistance zones, Trendlines etcetera
3. Technical Analysis helps with adequate market timing–Timing is a very important factor for a forex trader because a trader has to know the right entry and exit of a trade. Technical analysts use these various technical tools to decide points of entry and exit of a trade order, and these tools help to decide accurate stop loss and take profit point value.
2 Major Technical Analysis Tools
These 2 major technical analysis tools help explain this post-Fundamental Analysis Vs. Technical Analysis: 2 Major Myths & Solution better and in a more advanced study.
- Price Action
- Technical Indicators
Price Action – This is a movement of price over time with relation to market history. Major price action tools are support and resistance, Japanese candlesticks, and trendlines. These 3 are my major guidelines for trading the forex market.
Technical Indicators – What are the 4 types of indicators? Technical indicators are more than 4. But I will explain the major and important 3 I use for my trading, these are MA, RSI, and ATR.
What are good trading indicators? No indicator does not have an advantage, a trader has to master one or more indicators concerning his trading skills and plan.
What is the most accurate trading indicator? For the benefit of this article Fundamental Analysis Vs. Technical Analysis: 2 Major Myths & Solution there is no most accurate trading indicator because indicators are not just one size fits all. A swing trader would prefer one indicator over the other than a day trader.
Do indicators work in trading? Yes, indicators work when used with other technical tools appropriately and not just on their own. For example, trading with a MACD, and its saying price is overbought and you are expected to sell, placing a sell order without putting other factors to use could cause you to lose money.
The 3 Technical Tools I use in Trading Forex
1. MA – Moving Average, I use both 20 & 50 periods moving average. Moving average is a trend trading indicator
2. RSI – Relative Strength Index – This is a momentum trading indicator. I use a 10 period RSI.
3. ATR – Average True Range – I use a 20-period ATR. It is a volatility trading indicator.
Difference Between Fundamental Analysis and Technical Analysis
Both fundamental and technical analysis have to be learned and understood successfully because they do not stand separately on their own, the view of the writer Fundamental Analysis Vs. Technical Analysis: 2 Major Myths & Solution is never to prioritize one analysis over the other. A professional trader has to ensure he uses both analyses to his advantage while maximizing profit. Below are the few differences of both analyses.
1. Technical analysis can be used to predict entry and exit of trade while fundamental analysis will not be able to say more about entry and exit points accurately.
2. Fundamental analysis answers to what exactly is making a currency pair rise or fall while technical analysis will not be able to answer such questions about market direction.
3. Trading indicators lag behind price movement and this could make a trader lose money if he does not always consider the economy news release.
Conclusion
This post on Fundamental Analysis Vs. Technical Analysis: 2 Major Myths & Solution, opens the mind of the reader to understanding how both analyses have importance and one should not be discarded for the other. Successful Forex market trading lies in the understanding and perfection of both analyses to better trade with their uniqueness and joint uniqueness.
