This is regarded as one of the popular debates among Forex traders. Beginners will often wish to know which type to subscribe to, nevertheless, the position is that there is no consensus on which form of analysis is better, not only in the Forex market but other markets also, such as the stock and commodities market. No doubt, Forex analysis informs trading decisions and helps traders decide whether to buy or sell on the currency market. Admittedly, each form of Forex analysis exhibits unique characteristics, styles, and benefits. However, since the end goal, regardless of which form of Forex analysis is employed is to make profits from buying or selling currencies; this article will not bore you with a common comparison between these 2 forms. Rather, this article examines their unique importance independently of each other and subsequently, proposes an ideal answer on that basis.
Which Should You Pick?
Trading is driven by expectations that a currency value will rise or fall against another currency on the Forex market. Currencies as we know, change value over time for geopolitical, economic, and social reasons; due to the economics of things as a whole. Traders buy and sell currencies either based on market analysis or sentiments, although, oftentimes both eventually influence trading decisions. In reality, within the Forex market, Forex analysis is further divided into 3 factions namely; fundamental analysis, technical analysis, and the combination of both forms. In any case, in an attempt to decide which Forex analysis is ideal, it is vital to first and foremost, understand what these 2 entails, that is, fundamental and technical analysis.
Fundamental analysis implies a Forex trader who evaluates economic indicators that influence the price of currencies; largely the forces of demand and supply within the larger macro-economy. Fundamental analysts rely on economic indicators and real-time news which is oftentimes arduous, time-consuming, or expensive. Fundamentals predict market prices by studying economic indicators such as gross domestic product (GDP), inflation rates, international trade, employment growth; within the domestic and global markets. Oftentimes, these traders stay up-to-date with daily market news, geopolitical events, or even government announcements on fiscal and monetary policies. Take, for instance, the Trump Bump. Furthermore, fundamental analysis is a common tool well suited for medium- and long-term trade, as it is more influential in nature, especially in terms of market directions. Due to the increased sentiments caused by market news and economic indicators, successful fundamentals rely on proper risk management to manage such market-induced volatility.
Technical analysis on the other hand, simply involves the examination of historical price movements to predict future fluctuations and market trends in the short term. This is why most technical traders are day or swing traders. With this form of Forex analysis, traders analyze chart patterns and trends and highlight repeated patterns, to determine the strength or weakness of currency pairs. After all, the Dow theory presupposes that price movements are historically repetitive. Evidently, technical analysis is more indicative in nature, and it prioritizes timing with the end goal of determining specific entry and exit points. This is why technical analysis is simply a forecast of the price of movements restricted to previous chart patterns, especially price and volume. Traders categorized within this faction analyze the market using candlesticks, chart patterns, slopes, and averages, among other Forex machine indicators. As a result, technical traders are expected to be able to carry out advanced maths, calculations, and statistics. Interestingly, strategies surrounding this form of analysis have been made easier with access to free and automated tools and software that quickly analyze patterns. Today, we have free software that executes advanced and integrated analysis of market trends and chart patterns in real-time – even in minutes.
No doubt, both forms of Forex analysis offer unique values for successful trading. Despite the fact that traders may subscribe to either of the two forms based on their trading strategies, there is no harm in employing both forms to have an edge. When it comes to Forex trade, fundamental analysis, and technical analysis, although independent of each other, are coterminous. Moreover, being able to effectively combine and employ both forms creates a tendency to make traders more adept at navigating difficult and varying market conditions. The ideal analysis will depend on a number of factors, particularly the underlying market conditions. As a result, a trader may rely on these 2 forms to the extent to which they are suitable for a particular market condition or trade target. For instance, a trader may analyze market news and economic indicators such as interest rates to know why the value of a currency may fall, and study chart patterns and candlesticks to know the corresponding movement, and when to enter and exit trades. Simply put, there is no one-size-fits-all analysis, hence why not enjoy the best of both worlds.
For beginners, it is recommended that they should be able to use these 2 types of Forex analysis, to the extent that they suit their trading strategies, styles, and target. Forex traders who nevertheless insist on 1 specific type of Forex analysis, still, it is advised that they have at least, basic training in the 2 types due to some of the reasons stated above, as well as emergency economic situations; such as the Coronavirus pandemic.
Ideally, there should be no cause for conflict because they are not alternatives demanding that one chooses one option and forgo the other, especially when sentiments are the driving force behind market behaviour. Even with technical strategies and indicators, the fundamentals can very well disrupt accurate market predictions. In the same vein, economic indicators are not also all-encompassing and are unable to indicate actual entry and exit trade points, as the technical patterns do. Perhaps, this is a pointer to the reality that the subject matter is well beyond a case of ‘versus’, and perhaps not. In all, the ball is in your court as a trader.