Fundamental Analysis vs Technical Analysis
Any Forex trader should know that both fundamental and technical analyses are necessary when trading. Regardless of the trading strategy and style, traders have a reason for buying or selling a currency pair.
If that reason comes from analyzing a chart pattern or from using a trading theory, it means the trader uses technical analysis. Any other factor intervening in the decision-making process belongs to fundamental analysis.
In other words, anything that isn’t technical is fundamental. Therefore, for well-informed, proper trade analysis, both of them are indicated.
A comparison between the two reveals their extreme divergence. Fundamental analysis, for instance, suits very well to news trading.
Fundamental Analysis Particularities
The economic calendar comprises economic data from major economies around the world. When released, important data creates volatility and opportunities in Forex trading.
The rule of thumb goes that the stronger the economic performance of an economy, the better for the currency. Traders, therefore, will react positively to solid economic data and will buy the currency.
Part of any Forex education program, fundamental analysis is a pillar of Forex trading, with the economic calendar’s interpretation at is core.
The data part of the economic calendar is grouped into different categories. Based on the importance, the market’s reaction differs too.
The Forex market, for instance, reacts to inflation and jobs data, GDP (Gross Domestic Product), Retail Sales, and so on. Because both the time and an estimate for the future release are known in advance, traders react depending if the data is positive or negative for the currency.
Any other news other than economic data still falls under the fundamental analysis category. For instance, political elections, economic summits, or even natural phenomena like earthquakes, storms, and so on.
Technical Analysis Particularities
Technical analysis deals with charts, patterns, trading theories, indicators, etc. All the trading tools used to analyze a currency pair belong to technical analysis.
Nowadays, a Forex broker gives access to various trading platforms. They all have a plethora of technical indicators to use in forecasting future price levels.
Traders interpret the potential new prices by looking at what happened in the past. It is said that what’s on the left side of a chart is free information and technical analysis helps to put that information together and project future levels on the right side of the chart.
Technical analysis uses indicators (trend indicators and oscillators) and trading theories (e.g., Elliott Waves, Drummond, Gann, Pitchfork, Dow, etc.) in the process of forecasting future prices. Besides that, traders have a large number of trading tools to choose from and use: Fibonacci retracement and expansion levels, trendlines and channels, arrows, and so on.
We can say that fundamental analysis gives the reason why a market moves. Without reason, the currency market will remain in consolidation for long periods.
If the fundamental picture gives the reason, the technical analysis gives the direction, or where the prices move next. Mastering both is essential for successful market speculation.