If you are a forex trader, you can either trade via fundamental analysis or technical analysis but which is best? Lets compare the advantages and disadvantages of each.
Fundamental Analysis
Currencies are affected by the fundamentals and these include:
The political situation, strength of the economy, government policy, the interest rate outlook to name just a few.
These are FACTS and the various participants look at them and decide which way prices should go.
The main advantage is:
The direction of the currency is normally in line with the long term fundamentals and this is reflected in currency trends lasting for months or years in line with economic and political cycles.
The main disadvantage is:
The people who look at the fundamentals are NOT making logical judgements they are influenced by the emotions of greed and fear.
We all have the same facts to look at but we all make subjective judgements on what the facts mean.
This means that price spikes are common and these don’t always reflect the fundamentals – Keep in mind it is humans as a collective group that decide price and they do NOT Conform to objective criteria.
To compound the problem we live in a world of instant communications, where the news is discounted in seconds and reflected in the price in a split second.
Now let’s look at technical analysis and why it is the best way for a trader should base his forex strategy upon it.
Forex Technical Analysis
Technical analysis contrary to belief, actually takes into account the fundamentals – it simply assumes that all fundamentals will show up in price action - but it does something more it takes into account the greed and fear of the participants, that motivate the individual participants.
A simple equation for this is:
Fundamentals + Investor Psychology = Price.
Forex technical analysis takes into account both inputs that make up price and they simply look at their forex charts and let them tell them where to execute their trading signals.
The advantages of forex technical analysis are:
It gives you the overall picture, is less time consuming, keeps your emotions out of trading and lets you trade the reality - without having to impose an opinion.
You trade the truth and that is the market price as you see it NOT what you think it should be.
The disadvantage is:
In the way that people use it – Most forex traders think they need to predict but that’s just guessing and hoping and you wont get far doing that!
Technical analysis will work, but only if you view it as a method to put the odds in your favour and act on confirmation of price changes.
For most traders a forex trading system based upon technical analysis is the best way to trade - you just need to be able to understand its advantages and limitations but that won’t stop you making a lot of money if you trade with the odds.
One final point:
They are completely separate forms of analysis and you should not mix the two – you are either a fundamental or technical trader. Our view is you should be the latter if you want to achieve currency trading success over the longer term.
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