Technical vs Fundamental Analysis

Danielle Franklin

As a beginner in forex trading you might wonder which analysis suits you best – technical or fundamental. Is it better to concentrate on one of them, or rather combine the two for better understanding? What do other traders use to analyze price movements?

Technical analysis uses forex market data, such as prices, volume, etc., together with technical indicators, such as relative strength index, moving averages, Fibonacci, etc., to decide the trading positions and forecast future price movements.

Technical analysis is based on:

1. examination of chart formations

2. differentiation of trends

3. identification of buying and selling prospects

4. analyzing highest and lowest price of a currency

5. understanding of opening/closing prices and volume of transactions

Depending on the trading style, forex trader can use technical analysis on a daily basis (5 minute, 15 minute, hourly), weekly or monthly basis.

Technical analysis uses the assumption that all market information and possible currency volatility can be obtained from the price chain. Forex trader who uses technical analysis believes in three fundamental assumptions – the market moves according to all factors, the price movement is purposeful and connected to these events, the history tends to repeat itself over and over again. In other words a trader looks back at what has already happened and makes decisions based on the believe that volatility will generally have the same pattern of the past.

Fundamental analysis uses financial news and economic news, such earnings and consumer reports, economic data releases, interest rates updates etc., together with non financial information, such as political news, weather broadcasts to determine the trades.

Fundamental analysis involves the analysis of current political and economical situation in the country of the selected currency. Generally, the country’s economy relies on the following factors:

1. Central Bank’s interest rates

2. National unemployment data

3. Tax policy

4. Inflation rate

5. Political unrest or transition

Forex trader who uses fundamental analysis studies the external factors which may affect the supply and demand of the market. Fundamental analysis in forex assumes that the market is unpredictable and the information can’t be immediately obtained; the currency prices are inconsistent and will change according to the future economic conditions.

So which analysis is more vital? Can a trader use only one in order to succeed or it is important to combine the two together?

The answer is simple – don’t limit yourself to one kind. Fundamental and technical analysis complete one another and both are vital for successful forex trading.

Comments

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waheed - forex broker comparison

|2011-03-03 11:28:58

fundamental analysis is better then technical i always these activities.

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Forex Broker Rating List - Forex Founders

|2011-04-04 00:04:47

Although technical analysis and fundamental analysis are absolutely different
from one another, there are many traders who have successfully used the
combination of the two. In the end, no one can benefit from following a single
method all the time. For maximum profits it is necessary to combine methods so
as to get a clearer picture of the market and take advantage of the
opportunities available.

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buzzingstreet - Bse and Nse tips – Buzzingstreet

|2011-05-19 05:44:32

Hey,
Current stock market conditions are not favorable for safe investors.
Market is trading highly volatile. Never ignore using stoploss while doing stock
market trading.
Day traders should keep very close eye on Nifty and its
important levels so that traders can earn money rather than losing it.

Keep
posting
Buzzingstreet

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pipcity - Tech analysis

|2011-07-02 05:20:18

I personally trading fx for more than 2 and half years, at my pre school stage
of trading i grab every fundamental news and it's effect on respective currency
pair, but without tech analysis fx trading is like driving a car without horn in
a busy LA street.