Getting Started With Forex Trading: Technical vs. Fundamental Analysis
Nowadays, every second person is interested in forex trading due to its several lucrative prospects. Though forex can be extremely risky if you delve into it without proper knowledge and plan, it is a great way to maximize your earnings even with small capital.
That being the case, learning about forex analytical strategies and gaining quality trading skills is the first step towards becoming a capable trader. In this write-up, I have explained the primary two analysis techniques with a brief debate regarding which is better.
Before coming to the main topic, let us get a brief overview of what forex trading is.
The Largest Financial Market: Foreign Exchange
Forex, a short form of foreign exchange, refers to the largest global financial market with over $6 trillion daily trading volume where currencies are actively traded. This electronic and decentralized marketplace remains operational 24/5, where over-the-counter currency exchange occurs.
Let me mention here that in the forex trading arena, there is no “physical” trading of currencies. Instead, the traders speculate on the price direction of relevant currencies for attaining profits. This guesswork is not random as traders utilize various strategies and techniques to determine the possibilities of future price trajectories.
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The Two Primary Analysis Techniques
The two basic analysis techniques are fundamental and technical analysis, which help the traders decipher market conditions and predict price fluctuations. Both analysis methods provide an idea about the market circumstances but in different ways.
Technical analysis refers to the examination of the previous charting patterns and price movements of financial markets to forecast future price action. A technical analyst uses numerous trading strategies involving a combination of technical indicators (a central component of technical analysis) and price action to identify high probability scenarios of upcoming price activity.
This technique is based on the fact that history repeats itself and price progress in predictable patterns. According to the technical analysis theory, price variation itself incorporates and displays all the market information necessary for trading.
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Talking about the central features and indicators relative to this analysis method, the importance of “support and resistance levels” that point to the key areas of price is unparalleled. Similarly, oscillators and overlay indicators such as RSI or moving averages are also common technicals necessary for studying market volume and price movement.
All in all, we can say that technical analysis assimilates an amalgamation of diverse tools, indicators, and strategies for marking trends, price ranges, and possible “continuation or reversal” points.
On the other hand, Fundamental analysis is a comprehensive analysis technique that involves studying various micro and macro-economic, political, or social factors to determine the true value of a currency. A fundamental analyst grasps the best trading opportunities by considering a country’s economic policies, inflation scenario, employment rates, interest rates, and their impact on a currency’s valuation.
Through this analysis, you can identify the bigger picture of a country’s economy and evaluate its intrinsic scenarios, through the news releases and financial reports. Determining these broad aspects makes it easier to predict the forthcoming price direction. For instance, traders can place a “buy” trade on a currency with good intrinsic worth and prospects.
Technical vs. fundamental analysis: Which is better?
Technical and fundamental analysis both have their pros and cons depending on the situation. Generally, most forex traders utilize technical analysis, whereas many combine the two methods for achieving optimal results.
Fundamental analysis may be an excellent option to ascertain a currency’s long-term overview, but its short-term price movements may significantly vary from the fundamental deductions. Price moves in waves; it cannot continuously go down and also cannot constantly shoot upwards. From this point of view, technical analysis shines by providing ideal opportunities to extract profits from these ups and downs.
However, both analysis techniques are significant as numerous news events can render the technicals useless. What I would say here is that even if you are a technical analyst, keep track of the basic fundamentals as well to not receive a sudden shock from some major news or data release.
Closing thoughts…
Approaching the markets with a balanced approach and a well-established plan is essential to remain successful in the trading arena. Never put a stop to your learning phase, and keep gaining trading knowledge as forex is a vast domain with varied intricacies and ever-changing dynamics.
