In Forex trading, there are two main types of analysis – fundamental analysis and technical analysis. There is no answer to which technique is any better as it depends on a trader’s personality, but need patience and discipline on the part of the investor.
Each has distinct differences and advantages and disadvantages, and the differences between the two approaches dictate how traders approach their work.
WHAT IS FUNDAMENTAL ANALYSIS?
Fundamental analysis is the art of measuring value, studying the economics of a country and examines the underlying economic conditions of a currency. Following the macroeconomic environment can be an exhausting approach if you are not up-to-date on economic news. For traders who have a good knowledge of economic news, and understand macroeconomics, this could be a very profitable approach.
Generally speaking, traders buy currencies with stronger economies at a low price and sell currencies with under performing economies. Then traders keep these currencies in the hope that prices will move back up to their fair market value. It can take years for undervaluing currencies to rebound and the exchange rate to rise.
As a fundamental trader, be smart about the trades that you choose. If you fail to do so and get caught in a sideways ranging market, you could go without getting paid for some time.
Fundamental traders can profit from significant news events. As a trader with knowledge of an upcoming event, you should research the potential outcome of the event, and buy into your position. The market will become volatile during this event, and the prices before and after will have changed.
Fundamental trading is also better for position traders who keep trades open for more extended periods. This form of trading is even better for those who can not spend time micromanaging trades which is more normal if you have a day job or other obligations that are often prioritized. So, fundamental trading is most appropriate for two types of traders. Either those up-to-date on significant news events and can research thoroughly, or position traders.
If you have time to spend in front of a computer and enjoy chart analysis, then technical analysis could be a better approach for you.
Fundamental analysis is mostly about being aware of upcoming news events, and reacting quickly to the unscheduled ones. Here is some additional reading to get you going.
If fundamental traders focus on news events, technical traders concentrate on reading price charts. Technical traders use a variety of tools and indicators to help them identify trends and patterns, and helps traders to identify high probability situations. These are ones in which the currency pair has a good chance of moving in a specific direction.
Experienced traders know how to turn a high probability trade into short-term profits, regardless of whether the market is moving up or down. The ability to make money in any market is one of the most significant benefits CFD and Forex trading.
A common excuse people have for not learning how to do technical analysis is the notion that you need to spend all day in front of the computer to be successful. The advantage of technical trading is the ability to make good consistent gains in any market without feeling like you have a second job.
Here is some further reading to get you going with the basics.
Both the technical analysis and fundamental analysis have their limitations which is the main reason why some professional traders choose to combine the two. If both technical and fundamental data suggest a profitable trade, the probabilities of success can increase considerably.
There is another school of thought that believes that all fundamental factors are already priced into the data, which means that you only have to read the technical data to predict the markets best. If you adhere to this school of thought than technical analysis is a superior form of trading for you.
Some question the validity of technical analysis. The efficient market hypothesis claims that all past price information is already reflected in the current price. If this is the case, since all the data in the charts is old information, there is no exploitable data to beat the markets. And in this way, fundamental trading is the only way to accurately speculate on future pricing.
Every successful trader knows that it takes study, practice, and dedication to get to the point where you can achieve consistent monthly profits. Whichever way you choose to trade, you have to trade with knowledge and discipline.
You don’t have to worry about which one of the two approaches is better. Instead, take advantage of both of them to help make better-informed trading decisions, and help you find more opportunities.