It's a hit-or-miss to trade the Forex market without a strategy or a system.
Sure, some traders can find success in trades absent of rigorous analysis, but those who managed to work luck by their side will soon find that their winnings were short-lived.
In trading Forex, there are two approaches or schools of thought that traders generally use to add some basis for taking trades: technical and fundamental analysis.
And this post will put the two methods up against each other -- a fundamental analysis vs. technical analysis in Forex trading showdown.
After reading, hopefully, you'll be able to decide the best one to use.
Defining Technical Analysis and Fundamental Analysis
But before you understand the difference between the two approaches, you must first be able to explain them accurately and identify the elements each method uses.
Currency traders using fundamental analysis or FA study the factors that affect the demand and supply of currencies in the market like interest rates, GDP numbers, inflation, employment data, global risks, etc.
Typically, fundamental analysts employ economic indicators as a basis for their trades.
They may also pore over economic calendars to gauge what sort of information about a particular country will be publicized in a given day or week.
Analyzing the news is also an FA activity.
For those under the technical analysis sphere or TA, charts and price action is of most importance.
Technical analysts use charts to plot the exchange rate fluctuations caused by the changing demand and supply in the market.
With those charts, those who practice TA will look for repeatable patterns that put them in the most statistically favorable scenario.
In a nutshell, what technical traders analyze is past data to predict the future movement of prices.
Difference between technical analysis and fundamental analysis
The overview of both analyses stated above will give you an idea of how completely different TA is from FA, but here a few essential pointers to help you understand their distinction even more.
Fundamental data is what moves the market.
For example, traders often view a rate hike as generally positive for a particular currency.
So, upon announcement of an interest rate increase, the price of that specific currency could soar against other currencies.
It's the same sentiment that traders have for high CPI numbers.
Technical traders, on the other hand, believe that all information that is known or can be known about a particular asset is already in the charts.
To help you understand this, take the news about Bitcoin's scheduled "halving" on May 2020.
Some TA traders believe that this Bitcoin event is already priced in the charts.
Since the crypto world is up to speed on most of the latest facts and rumors percolating its most popular asset, proponents of technical analysis believe that some traders have already taken action upon knowing about the Bitcoin halving.
Some point to the move from $3,300 to $12,000 this year was already the result of the market digesting the information.
Bitcoin halving pertains to the rewards that miners (those who complete the transactions on the Bitcoin network) received being reduced to half.
Here's a video explaining it:
Why Would You Want To Trade Based On Fundamentals?
Trading based on fundamentals will warrant you to analyze events or data about a country's economy that may trickle down to your trades.
You're also trying to understand what information has the potential to move the prices.
You can't say the same thing with technicals since TA doesn't cause the market to move, but instead, it predicts its course.
Why Would You Want To Read Charts?
Conversely, with technical trading, you have to have a keen eye for remembering and recognizing patterns on the chart.
You are well aware of the fundamentals, but you ultimately rely on price action to predict how your trade will go.
You also don't have an internal dialogue of whether some news coverage will affect your trades or not, but you spot the best technical setup that has statistically done well for you.
Which Is Better Technical Analysis Or Fundamental Analysis?
There's a never-ending debate about which analysis is better.
Fundamental analysts think they're right, and believe that technical analysts are dead wrong while some traders who practice TA feel the same way about the fundamentalists.
However, most blogs and videos have offered nothing but neutral answers to the question of which is the better analysis.
It always goes back to "whatever works for you" or "there's no right answer" and "it's what your skillset is most aligned to."
CITY INDEX REVIEW
City Index was founded in 1983 and originally offered only spread-betting. In 2001, the company introduced CFD trading on its platform, and by 2014, City Index became a part of the NYSE-listed Gain Capital Group, which also has Forex.com as a subsidiary. The company's headquarters are in London.
Tips For Figuring Out If You're A Fundamental Or Technical Trader
Here's the thing: it depends on what you want to do.
If you're trading the minute timeframe chart, it won't make much sense to be engrossed in fundamental data that could affect currency prices 6 to 8 months from now.
For example, you're aware of a change in a country's political leadership, but how does that factor in a trade that you need to be out of in the next 30 minutes?
On the flip side, it wouldn't make sense either to start using technical strategies designed for the same quick trades on positions you intend to hold on to for months a time.
What analysis you use should make sense, and it must suit the type of trader you are.
Considering your Skillset
At this point, you're probably aware of how the two ways for analyzing forex differ, but before you finish reading this article, here's a quick run-through of FA and TA to reinforce what you've learned.
Main Tool: Economic Calendar
Main Tool: Charts
Fundamental data moves the market
Aims to predict the most likely movement
Not every fundamental data may affect the trade
Believes that all information is priced in the chart
Now the question is: Which analysis is for you?