Understanding Technical Analysis vs. Fundamental Analysis In Forex Trading

Forex Trading: Technical vs. Fundamental Analysis

Some topics will never have a clear-cut answer, instead, they will spark a never-ending debate. As the old saying goes, “tastes differ” or merely “one man’s meat is another man’s poison.”

When it comes to the financial market, every trade has a way of making a profit. The method of analysis used by one trader can differ from another in the forex trading space.

The primary type of market analysis comes down to either technical or fundamental analysis. However, the debate is about the best between them, and whether it’s better to be a technical trader or a fundamental trader.

The two aspects are not the same with each of them having particular advantages and disadvantages. Here is everything you need to know about the two analysis methods.

Technical Analysis

Technical analysis is merely forecasting based on studying the past movements in the price. Perhaps, it’s more of an art than a science. When trying to predict price movements, technical analysis brings several nuances which in most cases can lead to various conclusions.

The price data, as well as the charts, are the primary tools in the technical analysis regardless of the timeframe. The past patterns can help a trader to predict the future direction the market prices can take and hence prepare well.

The method can be used for any trade, including cryptocurrency, indices, commodity, stocks, bitcoin, and even futures.

Pros

  • It’s easy for traders to find the trends and know whether the prices are stuck or moving
  • It’s accurate displaying the patterns hence a trader can predict the future price movements smoothly
  • Regardless of your timeframe, you can easily apply technical analysis
  • Ideas can be easily programmed
  • It reveals the mood of the market
  • The data is readily available as there’re a plethora of sources
  • It’s easier to use as it doesn’t involve many variables and hence it’s less time-consuming

Cons

  • Sometimes technical analysis provides conflicting or mixed signals which are as a result of the quick shifts in the buy and sell schedules
  • Can be influenced by bias as a trader may perceive the information from the charts differently
  • It’s also can be subject to some controversial conclusions hence can’t rely on one judgment

Fundamental Analysis

This is a form of analyzing the market in determining the underlying value of any security by studying as well as assessing the economic data. The analysis evaluates the overall conditions in the economy via financial data like employment, Inflation, GDP, and interest rates.

The traders keenly examine how these factors are performing and hence be able to predict the direction the trades can perform. Basically, the fundamental analysis explains “why” rather than “what.”

Pros

  • Traders studying the economic calendar helps them to understand when the markets will likely move
  • It supports any trader to craft a long-term understanding of a particular currency pair
  • The fundamental approach helps one know every country’s  economy across the world hence proving an insight into the global market conditions
  • Helps in finding valuation

Cons

  • It’s highly time-consuming as it can’t provide an objective as well as a reliable method to time the entries and exits
  • The analysis is not suited for the short-term
  • The process is highly subjective as the assumptions that are drawn from the data may vary among the economists and analysts
  • There can be information overload as it’s cultivated and hence the information can be too much for traders to digest it all

Final Thoughts

So, is it a technical analysis or fundamental analysis? Depending on the one utilizing the methods, both come with advantages as well as disadvantages. Technical analysis has data readily available with little time to find as well as use.

Fundamental analysis is broad and provides current information of particular economies hence giving traders insights into the global market.

Nevertheless, there’s no right or wrong answer. You only have to decide which one works better for your needs and liking.