May 22, 2019 | 06:08 AM


31.08.2018Fundamental or technical? Making forex analysis choices

As with any form of investment, there?s always debate about the best strategies for forex profitability.

As with any form of investment, there’s always debate about the best strategies for forex profitability. For many foreign exchange (or forex) traders, the choice often comes down to opting for technical analysis, fundamental analysis – or a mixture of both. Examples of each type can be found in the graphs and analytical articles often seen on forex websites and in other similar locations. Traders of all varieties can benefit from learning about forex signals as some of the skills required can be applied in other areas.

Even if one particular route is chosen by the trader, it’s always wise for them to have knowledge of the other in case they change their mind. When it comes to investment techniques and skills, knowledge really is power. And it always tends to be the best-informed traders who are the most successful. With that in mind, this article will start to explore these two varieties of analysis – and think about the advantages and disadvantages of each.

Technical analysis

In essence, technical analysis focuses on the trends which emerge from the swathes of data out there on market-wide trading behaviour. While fundamental analysis takes the wider market conditions into account, technical analysis zooms in purely on past and current trading behaviour. A technical analysis usually looks for the emergence of certain shapes and patterns in historic trading patterns, and this can, in theory, indicate what move the market might take next – which is a handy insight to have.

A whole host of different patterns are used to reach this kind of judgement. Certain patterns can, for example, indicate how likely it is that a price will be maintained at its current level, or how likely it is that the price will lose support and crash. While it may seem a little restricted to ignore wider market conditions when predicting outcomes like these, technical traders might argue that trader decisions have already priced in these sorts of external events anyway, so looking at decisions is enough.

It’s not as hard as it looks, either. Take a look at one of the one of the many forex news websites out there and it’s likely that many pieces of technical analysis will be available. Lots of the charts and graphs which appear on these sites are prime examples of this kind of analysis, so there are plenty of resources available for those who want to dip their toe in first.

Fundamental analysis

Fundamental analysis takes a different approach. An analysis of this variety will usually take much more into account, including the state of the economy in the currency’s country. In particular, they may look at the interest rate set by the central bank or other authority in the relevant country, as this often affects the value of a currency. Analysts using this method will often work out how strong the currency is compared to other currencies. This is ideal for forex trading where all assets are traded in pairs and relatively to one another.

To a fundamental analysis trader, taking all of this external news into account is a good thing because it means there are more opportunities to spot what might occur. But it also runs the risk of giving the trader clouded judgement. A trader with several pieces of relevant information, for example, may find it difficult to decide which one will be powerful enough to cause a market movement.

There are several different types of trading in the forex world, and the fundamental-or-technical analysis debate reflects just one of the strategy choices which will need to be made. But whether the focused approach of technical analysis or the wide-ranging views of fundamental analysis seem more appropriate, it’s certainly possible to find a suitable system by doing a little research.

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