Technical Analysis vs Fundamental Analysis in Forex
There is a great debate about which analysis is better in forex trading, fundamental or technical. Is better to be a technical trader or a fundamental trader? Undoubtedly, this is a million-dollar question. Throughout your trading journey, you will find strong advocates for each kind of analysis.
These two are the two broad methods of market analysis that help a trader to decide when and how to trade.
In this article, we will explain the difference between the fundamental analysis and the technical analysis and the two of these two types of traders.
What is Fundamental Analysis?
Fundamental analysis involves the study of political, economic, and social factors that influence the supply and demand of a financial asset and the risks that affect its prices.
This is a method to examine the political and economic environment and involves the assessment of the economic health of a country and its currency. Using this approach, a trader tries to judge whether the asset is over or under-valued. The stock traders are more familiar with this fundamental type of analysis.
In forex, for example, a fundamental analysis of the US dollar would take into account the macroeconomics of the United States such as US inflation rates and GDP, trade balance, interest rates, the federal revenue, and the monetary policy of the US central bank.
Fundamental analysis does not take into account the movement of currency prices. Rather, this type of analysis involves the data points to determine the strength of a specific currency. Almost all of these data points are marked on easily available economic calendars. You can also access them via major financial websites.
What is Technical Analysis?
Technical analysis involves the study of the price movements of a financial asset, primarily using charts, to determine the profitable entry and exit points. It is the method by which traders utilize historical marketplace data: patterns, charts, trends, and technical indicators to predict future market movements.
The two most important indicators include:
1- The Relative Strength Index (RSI) Indicator
It is usually known as a momentum indicator and is a well-known technical indicator that allows the user to analyze the current state of an asset. Moreover, the Relative Strength Index provides potential overextended market positioning. It may also be used to indicate price reversals.
2- The Simple Moving Average (SMA) Indicator
This indicator aims to stable historical value data over a particular period to assist traders to identify potential entry points and trends.
Among the vast range of technical indicators, the common thing is they show the fluctuation of prices based on historical values. Technical analysis traders believe that it is possible to predict the future price movements by analyzing the past movements.
Which is the Best Analysis Method: Fundamental or Technical?
An honest answer to this question is “both”! A good fundamental analysis will assist you with why and a good technical analysis will tell you when.
Forex traders typically rely on technical analysis. Click here to check the IC Markets MT4.