In the world of trading, there are two main analysis methods: fundamental analysis and technical analysis. In this article, we’re going to take a closer look at the differences and the advantages and disadvantages of fundamental analysis versus technical analysis. What is better technical analysis or fundamental analysis? This question has been asked over and over again, and there is no clear-cut answer because it ultimately depends on trader’s personality.
Although fundamental analysis and technical analysis share a few similarities such as the need for patience and discipline on the part of the investor, each has a unique approach when used in Forex trading. I would like to briefly highlight the key differences between the two approaches and then explain why technical analysis is superior to fundamental analysis.
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What is Fundamental Analysis in Forex Trading?
Fundamental analysis is the art of measuring value and studying the economics of a country. Fundamental analysis examines the underlying economic conditions of a currency. Understanding the overall macroeconomic environment can be a very exhausting approach and is one of the reasons fundamental analysis can be a daunting task.
In general, traders try to buy currencies with stronger economies at a low price and sell currencies with underperforming economies. Then they hold these currencies in the hope that prices will move back up to their fair value. Because it can take years for undervaluing currencies to rebound and the exchange rate to rise, fundamental traders can sometimes go for long periods of time without getting paid.
In this regard, fundamental analysis is most appropriate for traders with a long-term mentality. If you’re looking for greater gains or perhaps even a reliable source of monthly income than technical analysis could be a better approach.
What is Technical Analysis
If fundamental traders focus on value, technical traders focus entirely on reading a price chart. Technical traders use a variety of tools and indicators to help them identify trends and patterns in FX currency charts. This allows traders to identify high probability situations; ones in which the currency pair has a good chance of moving in a particular direction.
Experienced traders know how to turn this high probability trade into short-term profits regardless of whether the market is moving up, down or sideways. In fact, the ability to make money in just about any market is one of the greatest benefits of being a technical trader.
One of the most common excuses people have for not learning about technical analysis is the notion that one needs to spend all day in front of the computer in order to be successful. The advantage of technical trading is the ability to make good consistent gains in any market without feeling like you have a second job.
Technical Analysis vs. Fundamental Analysis
Both the technical analysis and fundamental analysis have their own limitations and that’s one of the reasons why some of the professional traders choose to combine the two. If a trade is based on the technical and fundamental data the probabilities of success can increase considerably. There is another school of thought that believes that all fundamental factors are already priced in. If you adhere to this school of thought than technical analysis is a superior form of trading.
The validity of technical analysis has also been questioned, especially by the efficient market hypothesis which claims all past price information is already reflected in the current price and therefore there is no exploitable price inefficiency.
Every successful trader knows that it takes study, practice and dedication to get to the point where you can achieve consistent monthly profits in the market. Whether you choose to trade based on the technical analysis or fundamental analysis you have to trade with knowledge and discipline.
You don’t have to worry which one of the two: technical analysis or fundamental analysis is better, but rather you can take advantage of both of them. This will help you make better-informed trading decisions.