Technical or Fundamental Analysis?

In any financial market, not only in forex, two types of trading can be clearly distinguished according to the type of analysis. Type of analysis? How did you think the decisions to buy or sell were made? Well, it’s done like this, analyzing the market.

There are two types of analysis that you can perform to trade forex:

  • Technical analysis
  • Fundamental analysis

The debate is served and will never end. Technical analysis or fundamental analysis ?? Which one to take? It is an eternal discussion without a solution, to be honest, focus on one of the two without forgetting the other. Yes, you should take both analyzes into consideration even if the base of your operations is one.

Fundamental analysis

Fundamental analysis is a way of looking at the market taking into account economic, social and political factors that can affect the supply and demand of the currency of a certain country. In this way, if the economy of a country is scared, its currency will be strong and vice versa. Facing the strength of these socioeconomic factors of two countries, you can decide which currency of the pair is stronger to decide whether to buy or sell the pair. Very logical, right?

In basic terms: If the economy of a country is good the value of its currency will grow. On the contrary, if the economy of a country goes bad the value of its currency will fall.

For example, if the Japanese economy has been bearing good results and has done so more solidly than the US economy, most international investors will have more confidence in the yen against the dollar which will make the USD / JPY have a downtrend (weaker base currency).

One type of socio-economic indicator would be, for example, interest rates. When the economy of a country picks up strength and goes in the right direction, normally the Central Bank of the country increases interest rates to control inflation and, consequently, the country’s currency also becomes stronger.

This, of course, is a very basic view of fundamental analysis. You will have to know the most important socioeconomic indicators and how they affect the economy and currency of the country. We will dedicate other chapters to this.

Technical analysis

Technical analysis, in Forex and other financial markets, is based on the mathematical and / or graphic study of price movement. Therefore it refers to the historical action of the price to determine the future movement.

You will have already seen some chart than another of Forex. In these graphs what is reflected is neither more nor less than the past movements of the price and based on these the technical analysis is carried out. You will inevitably need charts to perform technical analysis.

For example, by looking at a graph you can see the dominant price trend of a certain currency pair to help you identify good opportunities to enter the market. The trend is out !! You’ll get tired of hearing things like “trade for the trend, never against it” or “the trend is your friend.” In fact, the main objective of technical analysis is to find a trend at its earliest stage in order to trade in the direction of that trend.

There are those who equate technical analysis with chartism, for me chartism or graphic analysis is within technical analysis, this being divided into two groups:

  • Strict technical analysis : Use so-called technical indicators. These indicators are obtained through calculations on the historical price using variables such as the price itself (undoubtedly the most important variable in technical analysis), volume (number of contracts or units traded) or open interest (contracts that remain open after a certain period).
  • Graphical analysis or chart analysis : It only uses the graphs drawn by the price movement as a source of information to determine trends and future movements.

What type of analysis is better?

As I said before, the best is a base in one of the two seasoned with a little of the other. You will find opinions in favor of one and the other and sooner or later you will realize that most traders, whether they call themselves technical analysts or fundamental analysts, agree on a great common ground, for example, it is very normal for a technical analyst is informed of the most important economic news and a fundamental analyst carries out basic graphical analysis

You will also find those who prefer to stay out of the knowledge of financial news so that they do not influence decision-making in their technical analysis, arguing that the effect of certain news will be reflected in the price action and therefore is technically analyzable.

On the other hand, you can find fundamentalists who argue that any graphic pattern found is pure chance.

Taking into account that both analyzes have significant difficulties in predicting the future movement of a currency pair, an intermediate point may be the best option:

You are looking at your charts and you see a perfect trading opportunity, you proceed to perform the operation very happy with what you are going to get, and boom !! -50 pips in a few minutes. What happened?? Oh, an interest rate cut has been announced for the currency that you thought was stronger …… .. You have to find your own balance between both types of analysis until you feel comfortable with certain tools, be they technical, fundamental, or a mixture of both.

Leave a Reply

Your email address will not be published. Required fields are marked *