Main Advantages of Fundamental and Technical Analysis
The fundamental analysis represents the sum of external factors that drive the price of an asset. In currency trading, fundamental analysis mainly refers to the economic news and data that comes our regularly about various economic around the world.
Traders use the data and interpret it in such a way that they become bullish or bearish a currency. For some traders, the only fundamental analysis is enough to enter and exit a market.
When used on short and very-short trades, fundamental analysis is the basis for news trading. On the other hand, when used to spot changes in monetary policy and economic developments, fundamental analysis has an impact on the macroeconomic picture.
A Forex trading decision also consists of building technical analysis scenarios. Using technical indicators and other trading tools, traders form an educated decision of whether to buy or sell a currency pair.
Both strategies have pros and cons, and the best approach is to combine the information given to forecasting the next move correctly.
Fundamental Analysis Advantages
Before anything else, we need to make a distinction between short-term and medium to long-term trades. The first ones refer to news trading and to the buying or selling of a currency pair mostly after economic data is released.
The second ones belong to macroeconomic analysis. After traders interpret the overall economic picture, they decide if the economic environment is bullish or bearish for a currency. Next, they act accordingly, by buying or selling a currency pair.
One of the main advantages of fundamental analysis is that the Forex trader understands the economic picture. By putting the elements together, he/she can put an argument behind a fundamental trade, having a reason to stay on the market.
Another pro on the fundamental side is that the economic calendar makes it relatively easy to know when the market will move. For instance, consider the NFP (Non-Farm Payrolls) week.
This piece of economic data is one of the most important in the trading world, as it causes extreme volatility in the Forex market. Every trader knows that the NFP comes out in the first Friday of every month, so the chances are that the currency market will evolve in ranges before the NFP release.
Hence, knowing in advance the release date of critical economic data helps traders to prepare better for the trade.
Technical Analysis Advantages
Technical analysis brings discipline to the trading strategy. A disciplined approach is a key to successful speculation and the pillar of any sound money management system.
Effectively, it dwarfs any other benefit technical analysis may bring. Using technical analysis traders set up a trade in a distinct way, using risk-reward ratios.
Any Forex broker gives access to trading platforms where traders use technical analysis theories and indicators to forecast future prices. Using patterns and trading strategies learned during the Forex education process, traders set the stop-loss and take-profit levels of any given trade.
Another positive on the technical analysis side is that a technical trade removes the emotions when trading. This comes as a result of integrating the technical analysis setup within the money management system.