Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
Today we are going to be looking at Fundamental analysis and technical analysis these are the two major categories of thought processes when it comes to analysing the forex markets with an intention to trade. The two methods are basically completely different in terms of approach and technique and will be our topic of discussion today.
The one thing they do have in common is that both methods are used for researching and forecasting future trends in market prices, and as with most philosophies you will find equal amounts of people supporting and denouncing one or the other.
Fundamental analysis involves assessing the economic well-being of a country which would in turn show us the strength or weakness of its currency.
It does not take into account currencies price movements but Rather, fundamental analysis traders will use data points to determine the strength of a particular currency.
A fundamental forex trader will compile data such as the country’s inflation, trade balance, gross domestic product, growth in jobs and even their central banks benchmark interest rate. This information can help to build a clear picture of the long term direction of a countries currency.
Here is an example of a economic calendar which fundamental traders can refer to and be able to keep up to date with the latest news data releases. There can be a great deal of data releases on any given day so traders usually filter out the less impacting data so they may focus on the medium to high impact releases.
By assessing the relative trend of data points, a fundamental analysis trader is judging the relative health of the country’s economy and whether to trade the future movement of that country’s currency, pairing a relatively strong economy with a another countries currency with a much weaker outlook can provide a high probability trade set up worth investing in.
Some economic news releases historically have positive or negative outlooks for certain currencies. The price movement and direction is never guaranteed but these events are seen to be a safer bet generally speaking.
More Developed nations generally welcome moderate inflation as it is a sign of a growing economy and Developing nations view decreasing, or maintained, inflation as a positive statistic as this keeps their price levels in check.
Technical analysis in its essence involves reading pattern formations on a price chart. Technical traders generally look for price patterns such as double tops, triangles and flags or triangles.
Based on these pattern formations a trader may determine entry and exit points for any given trade.
A technical analysis trader is not generally concerned about why something is moving like a fundamental trader is as the trends and patterns on the charts are their signals to open or close their positions.
Here we have an example of a chart pattern this is a double top pattern. The market forms the first high and rebounds slightly before creating a new high and subsequently gains downward momentum as the trend reverses. Historically speaking when the market forms a certain way there is a high probability of a directional market movement, trading this way is the foundation that technical analysis is built.
A technical forex trader may also look to assess the price action, trend as well as the support and resistance levels observed on a chart. Many of these patterns used in the technical analysis of the forex market can be applied to other markets as well.
Technical traders will also make use of indicators and oscillators which can be added to your price chart when analyzing forex currency pairs. Indicators such as Moving averages, Bollinger Bands, MACD, relative strength index, and stochastic are some of the more commonly used indicators in a technical traders tool box.
Indicators are preferred by technical traders because they are simple to use and learn and they can provide clear signals, they are never meant to be used alone but as an additional confirmation to your indications of trade entry or exit.
Getting started in technical analysis can be done quickly by assessing the direction and strength of trends. It is generally the more popular of the two trading types due to its easier to understand nature but by no means is it what I would call easy to master.
TECHNICAL VS FUNDAMENTAL ANALYSIS IN FOREX: CONCLUSION
So… In conclusion Fundamental and technical analysis involves two very different strategies and approaches to trading the forex markets. They both offer their own unique value and insights into supporting our trading decisions, and can help us greatly when trying to determine when we should enter or exit our trades.
While some traders prefer not to use these two types of analysis together due to their preferred trading style and goals, many traders use a combination of the two to give them a edge in the ever difficult market place. The benefits of combining technical and fundamental analysis are not to be ignored and you can not claim to be a seasoned trader with at least understanding both. Just ask yourself Why would anyone chose to ignore a tool that could possibly make their high probability trades more likely and more profitable in the long term.
I hope you have found our discussion today helpful ladies and gentlemen please sit back and contemplate what you have learnt here today and Remember contemplation is the key to learning.