Fundamental Analysis And Technical Analysis In Brief
In the main, there are two kinds of analysis that traders tend to use, either in combination or on their own. Each has its own merits and both need to be scrutinised carefully by anyone wanting to enter the world of Forex trading. Either method is a valid modus operandi, but to make a choice a beginner trader needs to look at both in some depth and decide which approach suits them best. We will have an overview of both concepts in this article, and they can be examined in further depth later in the course.
If you take a look at successful traders like Martin Schwartz and Jim Rogers, both used different analytical approaches to their trading. Martin preferred trading on technical analysis, Jim’s choices were based on fundamental analysis, although both would agree that applying discipline and emotional control to trading is paramount whichever analysis you prefer.
Fundamental And Technical Analysis – The Differences
It’s worth noting before moving on to the differences, that both analyses are in some ways similar. While traders can use one or the other analysis, they can even find that the end result may be the same. Take, for example, the parabolic price graphic.
- The technical analyst would gather data from his charts, see extreme values register on the indicators, and would be cautious about moving forward with a trend that has a dramatic counter-trend on the horizon.
- A fundamental analyst would come to a similar conclusion by examining the news sources, government and business declarations.
They are, in fact, different routes to the same point. One person might travel using cars, another by sea or air, or other appropriate transport. Different tools that can be used to find similar interpretations! However, there are some differences that we will explore within this and the other articles.
Fundamental Analysis In Brief
The fundamental analysis primarily evaluates intrinsic values and how these are influenced by different factors. These can include politics, financial law, social attitudes and the many other aspects of human life. It looks at the cause and effect relationship between economic developments and market movements, and how they then affect the supply and demand of an asset. These elements, known as fundamentals, are used as indicators to formulate a plan for Forex trading.
Analysts are looking at all the factors that affect a country’s economy, like how unemployment can affect the demand for that country’s currency. It’s all about supply and demand, and fundamental analysis is looking for indicators that a country’s economy is in good shape or en route to getting in shape. This indicates that it is good enough to attract businesses and investors, which in turn leads to having to buy that countries currency to purchase the available assets.
Is Your Choice Fundamental Analysis?
A higher degree of confidence can usually be seen from those traders who use fundamental analysis. They consider they are following in the tracks of many successful Forex traders, the men who have made billions trading in currencies. There is a certainty that following in the same steps will achieve the same results. This is an approach that helps to sustain composure when the markets decide to be volatile. By understanding the dynamics involved, a position can be maintained as long as the causation factors triggering the trade remain the same. Economic activity around the world is based on currencies, and the vagaries of all sectors affecting an economy hold implications for these currency trends. Once a trader understands the relationship of one factor to another, understanding these trends become more straightforward. Fundamental factors in a global economy are closely related, from interest rates on mortgages to a nation’s balance of payments, and they are routes that are clear to follow.
Technical Analysis In Brief
A relatively new discipline, technical analysis, is still being developed but it already holds a significant role in any traders arsenal of tools. Its value in short-term trading is recognised as the only predictive analytical tool to use for determining entry and exit points.
There are three assumptions that technical analysis is based on;
- The market does not need any other information other than the price.
- Price movement is not random, and there are technical tools that can assist in identifying trends and patterns.
- Things come around again. The past performance informs the present if you look at it in the correct way, although this can also be very subjective.
Technical analysis uses statistics to examine past data to predict future movements and patterns. It focuses on the prices themselves, not what effects them, and looks at the price movement and market psychology. The technical analyst is looking for a purchase to sell at a higher price, and the concept is that all the information needed can be seen in the price itself. Therefore looking at the price history will help to predict the future movements. They do say, ‘History repeats itself’, and that adage can simply describe technical analysis. Charts are the way that the history is managed in the world of Forex trading. Charts and graphs act as a visualisation of a currency’s history, where a trader is looking for patterns and trends to help formulate a trading plan, and take advantage of an excellent trading opportunity.
Is Your Choice Technical Analysis?
Everyone can take advantage of technical analysis. A novice trader or a seasoned hedge fund manager can benefit greatly from the tools available. These technical tools are a lot easier to get to grips with than the fundamental indicators, which do require a significant amount of studying. The elements to be considered are much fewer than with fundamental analysis, in that the primary focus is the price on which all calculations and plans are based. As our understanding of technical analysis has grown, so too have the tools available.
In addition, there is the added experience and knowledge of thousands of traders who have contributed exponentially to the growth and stability of this concept. Guesswork and conjecture are minimised when analysing price action. Interpretation of the data is subjective and can move into the realm of complex mathematics, where words like Fibonacci or Pivot points have their place. However, these can be learnt slowly, as can the effects of any error in interpretation. It is all a learning curve. Each flaw should be seen as the way forward to sharpening a trader’s analytical skills, and with better skills come the profits and wealth that is being worked for.
Conclusion – Pros And Cons
As your trading career begins, you will be thrown into the debate on which analysis is best. Take your time to find out more about both and which one suits your trading style and attitude. One might be better suited to you than another, or you could consider the advantages of combining both!
The advantages of using fundamental analysis include the use of analytic methods that are based on sound financial data, which helps to remove personal bias. There is also a focus of 360 degrees, that covers the long-term movement in economic, technological, demographical and consumer trends. Fundamental analysis is also systematic in its approach, using analytical and statistical tools to find the right currency pair to sell or buy. The in-depth study of financial and global news increases any traders understanding of the world they are working within. The main disadvantage of this approach is the amount of time it takes to undertake! It can be complicated and demands a lot of time and effort. As with most things you cannot plan for everything, but the fundamental analysis can give you the sense you have, leading to unexpected events that can cause problems.
The advantages of using technical analysis include that it gives a trader good insights into supply and demand, along with an overview of the market. It also tells you when to enter or when to exit, which is very valid information! The analysis provides current information on price value, and you can then base your buy or sell decisions on the patterns indicated in the charts. Disadvantages of this analysis method are too many indicators can sometimes create a confused analysis, with no clear directions. Plus, there is some indication that not using fundamental information can produce a higher risk in long-term plans. You can read more on both types of analysis in the following parts of this course.
More From The Free Forex Trading Beginners Course
Part 1: Reading A Currency Quote
Part 2: What Are Forex Pips, Leverage, Lots, And Margin?
Part 3: Explore Currency Pairs And Their Different Aspects
Part 4: Fundamental Analysis And Technical Analysis In Brief
Part 5: The Use Of Forex Technical Analysis
Part 6: The Importance Of Fundamental Analysis For Forex
Part 7: You Need To Apply Some Psychology To Be A Successful Trader
Part 8: Finding The Best Forex Broker Online
Part 9: Disclaimer