· Fundamental analysis traders look at events,central banks, political risk, or capital flows
· Technical analysis looks at historical levels,patterns or charting tools.
· Is fundamental analysis or technical analysis superior in Forex Trading?
What is fundamental analysis?
Fundamental analysis uses the following to value and asset or policy:
· fiscal flows
· market behavior/psychology
· monetary policy
Understanding fundamental analysis is a steep learning curve, but in our opinion, it is the most logical way to trade. The Webster Dictionary defines the word “fundamentals” as the central or primary rule or principle on which something is based.
When looking at markets, Forex specifically, it makes sense to understand and trade the way on which the market is based. Understanding how the large central banks are conducting monetary policy can help you value a currency. The large central banks comprise of Federal Reserve, Reserve Bank of Australia, Bank of England and the European Central Bank.
What is technical analysis?
In simple terms, technical analysis is evaluating the price of an asset. This is done by looking at:
· historical price levels
· charting tools (trend lines,Fibonacci)
· moving averages
· patterns, and indicators.
Within charting tools, there could be another 20 indicators:channels, harmonics, patterns, lines, Elliot wave, candlesticks, pitchforks… it could go on and on! Tradingview would be considered the technical analyst’s dream platform.
All of these analysis tools can be very overwhelming to beginner entering the industry. The majority of people will usually gravitate towards their ideal support and resistance, trend lines, and candlestick patterns.
It is important to utilize key levels and understand where price could potentially be valued as cheap or expensive. The Forex market consists of large individuals (institutions, funds, companies) buying and selling currency at specified prices. The price the use is deemed a fair price to buy or sell. It would only make sense for us to align ourselves with those individuals as well.
“But I trade news…”
Many will associate “news” trading to fundamentals. There's a lot more to fundamental trading than just looking at micro news events.Similar to trading earnings in the stock market, trading news in Fx is the quickest way to lose your account.
We receive this particular question often: There was US dollar news and it came out good, but the US dollar didn’t do what it was supposed to do. Why?.
You’ve probably asked a similar question yourself. The answer isn’t as straightforward as you would hope for. Simply, there are a lot of factors to the market that many beginners completely ignore or just do not have access to. The lack of knowledge about which something is based, in this case the market, causes a lot of confusion and wrongful assumptions.
Which analysis is superior?
The FX market is very dynamic and has a lot of moving components. To truly reach your potential, traders must have a good understanding of fundamentals and what is truly driving the market.
When driving a car, we need to understand the basics of how a car functions and how to use it on the road. There would be a lot more accidents if drivers couldn’t understand the basis of driving.
In regard Forex trading, the most important thing is to understand the basis of how market operates. Fundamental analysis is superior to technical analysis since we can rationalize why the market, we are trading is moving the way it is. Technical analysis still has relevance to trading and should also be considered, but fundamental analysis should come first.
To help support our position, you should check out the Mad Hedge Fund Manager’s thoughts on this matter:
Mad hedgefund manager- Why Technical Analysis Is Useless