The Pros and Cons of Using Technical and Fundamental Forex Analysis

There are basically 2 main methods that Forex traders use to analyze the market. These are technical and fundamental analysis. Pure technical analysts will say that it is impossible to sell news, because the market is very fast and whatever news there is the charts will also tell you. On the other hand, fundamentalists would say that only news moves the market. Technical indications are always following. So what methods should we use? To find out, let’s look at the advantages and disadvantages of both of these methods.

Technical Analysis

Technical analysis involves tracking past currency price movements and using indicators to help identify which direction the current price may be heading. This analysis can be manual or automatic. Under the automated system traders use software (expert advisor) or robot to help them locate trades and identify entry and exit points. Technical traders believe that all the necessary information needed to place a trade is on the charts.

Basic Analysis

Fundamental analysis focuses on the main economic, financial and political factors to determine the price direction of a currency. Basic traders believe that currency movements, whether they become stronger or weaker, are related to the stability of economic, financial and political situations. Therefore, basic reports and news are important to them. News and reports like interest rates, employment, trade balance and GDP are very important. Other information such as retail sales, durable goods, home sales and ISM will also affect the price movement.

Technical Analysis

advantage

-It helps to provide specific entry and exit point for traders during trading.

-Charting gives everyone an easy way to quickly identify trends. This is possible because the same data is also monitored by millions of traders, as a result if many Forex traders do the same, it can make a self-satisfying prophecy to strengthen the trends.

-It focuses on charts and indicators. This is without a doubt the easiest and most accurate method used by many traders today.

-Charts and tools can also help pinpoint when a trend is about to start or end. So help traders plan their profits and stop losses more accurately.

Disadvantages

-If multiple traders place their stops in the same areas, this may trigger a change in price movement because it may allow major market players to deliberately trade. prompt these stops.

-Tools used as lagging indicators. It can be dangerous to rely entirely on the assumption that current prices and trends predict future prices. They always do, but don’t have to.

-Full reliance on charts means you won’t get other signals that could change the trend.

Basic Analysis

advantage

-Basic analysis increases our knowledge and understanding of the global market. So help us get a clearer picture of the overall health of the world economy.

-We use fundamental analysis to explain some unexpected price movements. So find out what drives prices higher or lower.

– Major news releases can sometimes provoke large price movements when there is a large discrepancy between expected and actual results. If you can predict and capture this price movement, it can be very beneficial.

-Fund analysis is better used for predicting longer term exchange rate movement.

Disadvantages

-There is so much information that one can easily get confused.

-It is very difficult to use all this information to pin point a specific entry or exit point in a trade.

-A short term news release can give a false signal and mislead the trader into opening a trade. This signal always promotes a knee-jerk reaction in the market.

-Sometimes the information or news released may already be priced in the market. Therefore, the information has no significant effect on price action.

-It requires someone with at least some basic knowledge of economic background.

-News releases can sometimes create dramatic and rapid price movements for a currency pair in both up and down directions as the Forex market tries to digest the news. Inexperienced traders may find themselves caught up in a bunch of losses.

Conclusion

In my opinion, there is no ideal or best method of Forex analysis that will guarantee you 100% results at all times. Technical analysis and charting can help short-term traders make their decisions, while long-term traders need to keep themselves abreast of the latest news. of the economy and data related to the currencies of the country in which they are sold. tool. When used correctly, it can often help you do business more effectively. This is why most Forex traders tend to use both methods of analysis to make a trading decision.