Fundamental Analysis and Technical Analysis

August 28, 2013 in Forex Articles

A forex trader needs to learn a lot of things in order to grow as a trader and be able to formulate sound forex trading strategies.

One of the things he needs to learn from the get-go is fundamental analysis and technical analysis – and what their differences are. Many traders use both of these types of analyses at different points in order to gain more knowledge that will help them in making new strategies for their forex trades.

Fundamental analysis involves study and interpretation of various economic data and fundamentals. This includes studying interest rates, inflation rate, economic indicators, and employment rates.

Technical analysis involves the study and interpretation of technical data and charts.

But what are the differences between the two? Here they are:

Fundamental Analysis

Fundamental analysis is seen by many successful traders as one of the best ways to determine market movements. The aim of using fundamental analysis is to be able to gain a deeper understanding of a country’s performance. Being able to gauge how a country performs will help them determine if the value of their currency will rise or fall. The very center of this research is the economic performance of the country. Traders will pore through various economic data and economic indicators – and from there they can build a picture of how the country is fairing economically.

Fundamental analysis is a very holistic way of using information and data. It is not uncommon for traders to not just look at a country’s specific economic performance. They will also look at the global economic climate because these worldwide economic sentiments can also have a serious effect on a country’s economy. Fundamental analysis is also grounded more on long-term investments. If a country has been doing well economically and posting good economic numbers then the prospects for its currency to increase in value over time is quite high and most traders will usually ride that sentiment for the long-term.

Technical Analysis

Technical analysis deals with the historical prices and milestones of a currency’s value. Among traders who use technical analysis, their belief is that the currency’s past performance is the best indicator of how it will perform. Technical analysts do not really believe in looking at economic indicators. To them how a currency performs is a better gauge for their strategies. Their attention is solely focused on charts that indicate price movements based on hours, days or weeks. They use their analysis to determine the best entry point for a trade and where is the best exit point. Also, because of this perspective, they are not really concerned about long-term commitments to their position. They will make more frequent trades and will enter and exit the market a number of times.

So which one between fundamental analysis and technical analysis is a better direction to take? If you will look at how the big brokers and companies do their analysis you will see that they use a combination of fundamental analysis and technical analysis to better understand market movements and formulate better forex strategies. Doing both kinds of analysis is the best option since you get to see market movements from both perspectives. But your trading style is a big factor in the kind of analysis you should use. If you are more committed to long-term positions then fundamental analysis should be your focus. If you want more frequent trades and want to know when is the best time to enter and exit the market then you should use technical analysis.

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