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How to combine different types of analysis in Forex?

There are several methods of analysis that are available for traders and investors in the financial markets. Whether it is forex, equities or futures, market participants can either choose to analyze the securities using technical analysis or fundamental analysis.

In most cases, fundamental analysis is widely used in the equity markets, especially if you are a long term investor. Within the fundamental analysis, there are various schools of thought such as value investing, momentum investing, dogs of the Dow and so on.

Similarly, in technical analysis too, there are different ways to analyze the markets. It could be trend following, to breakout trading and even using waves such as the famous Elliot Wave theory.

Many traders prefer to concentrate on just one type of analysis as it becomes a lot easier to understand and to also master the art. Taking a combined view of the markets can however give you deeper insights and helps build confidence in the trades that you take.

Trading is, after all knowing when you are wrong and cutting your losses short. It isn't about making money and or being right all the time.

Focusing on both technical and fundamental analysis can therefore give you the much needed edge in the markets. It gives you a full fledged view of the markets. Prices after all, are driven by the fundamental news and the investor's view of the markets thereafter.

To put it differently, if fundamental analysis is all about the news and deciphering the economy, price action is merely the investor’s reaction to the news.

Let's now break down the two types of analysis that we have.

Fundamental analysis

Fundamental analysis mostly focuses on asking the question of why. Meaning that, why did price move in a certain way. The answer to this question can be found in the fundamentals.

The price movement can be explained perhaps by a certain news release such as GDP report or other economic reports or even a central banker's speech or an interest rate decision.

You don't have to have a degree in economics to understand the correlation between the price movements and the economic releases. Any economic release can be broadly classified into whether it is better or worse than the forecasts and secondly if the news is good or bad for the economy. Knowing this simple fact can help you to cut through the noise.

Technical analysis

Technical analysis on the other hand, focuses on asking the question of when. This means that asking a question of when will price test a certain level. Technical analysis is all about looking at past price history to predict future price movements. It is merely an offshoot of the fundamental analysis.

Traders can make use of indicators or focus merely on price action methods in order to trade with technical analysis. But when you combine the information from the fundamental analysis you are able to build a broader picture of the markets.

This will help you to further strengthen your bias when trading.

For most traders, technical analysis is all about merely following the trading signals and these are mostly rule based. However, without understanding the logic or the context, you won’t be able to get too far in being successful as a forex trader.

Now comes the question of which of these two types of analysis is better. Obviously, the debate on whether fundamental analysis is better than technical analysis and vice=versa has been going on for ages. However, one does not trump the other and neither can one exist without the other.

For many traders, both who are just starting out and those who have been trading for a while will realize that using both these approaches is no doubt a better way to trade. Traders can brush up on the fundamentals by simple reading the economic reports and the commentary that usually follows.

As we mentioned earlier, you don’t quite need to have an advanced degree. Many websites, break down the data for you in an effort to make it easier to read and understand.

So the next time you are looking at the markets, it always helps for you to understand that forces behind the markets that are responsible for moving prices and then applying this knowledge to the price action itself and trading accordingly.

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