Trading any type of financial market for a significant amount of time will begin to try and build a kind of system. Inevitably, it will start to focus on fundamental or technical analysis or a little of both.
Knowing the difference between the two types of analysis is the first thing traders must focus on when deciding what type of trader they plan to be.
Some Disclaimers
It not important which type of analysis trades will use; they can be profitable. But none of these analyses is 100% guaranteed. Even if traders became good analysts, either from the technical or fundamental side, it does not mean that they will necessarily make money. Traders need to look at the most likely scenario, not working with certainties. The long game is what they need to focus on, meaning they must take trades based on what might happen – and knowing that it won’t always work out.
Technical Analysis
Many retail traders focus on technical analysis. And this is because it is easier to define. That means traders look for things such as support, resistance, trendlines, moving average crossovers, and more. For instance, a trader using technical analysis to trade markets will look at the totality of price action.
In addition to that, the technical analysis based traders are looking closely at what price do, not necessarily what it should do. They simply follow what the markets show as long as the price is concerned. With that, it makes the trading of financial markets slightly easier.
Here, traders don’t have to think about different variables other than what the price is doing and if it fits the definition of a technical set up. If they choose various factors to get involved in trading, like fundamental analysis, things can become more complicated.
Fundamental Analysis
On the other hand, the fundamental analysis concentrates on economic factors and what a market must do. And this means traders will take economic figures and announcements to figure out where the price is going. All things being equal, when interest rates are increasing in one country over another, the currency must rally over the other one.
Also, the forex tends to move in the directionality of expected interest rate moves. But there are more issues that can arise, like geopolitical situations.
A Blend is Normal
Most of the time, traders will have a blend of both types as they get involved in the market. The use of the two analyses gives a bias in which to trade in the market – even though most traders use about 80% technical analysis. The longer-term fundamental biases determine the trend, whole the technical analyst seeks for signals to get involved.
There is no right way to trade the currency market, but remember that technical analysis is simpler than fundamental. And this is because, at the end of the day, fundamental analysis shows what ‘should happen,’ ignoring what is on the chart. Still, most people use a little bit of both in making their trading decisions.