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CO09 - Which Type of Analysis for Forex Trading is Best?

"Fundamental analysis and technical analysis might seem two entirely different approaches to understand what the market is doing. However, both these types of study of the financial markets derive to the same conclusion. They both answer the question whether price is currently reflecting all the news that there is currently available. Fundamental analysis or technical analysis is often used in isolation. This mistake means that traders trade the markets without knowing the complete picture. In this article, we look at why traders should combine both fundamental and technical analysis when it comes to trading the forex markets. You will see that both these types of studies are closely interlinked. When you have both fundamental and technical picture of the markets, you are able to easily understand what price is doing. This in turn increases your confidence in trading the markets. Besides fundamental and technical analysis, you can also combine sentiment analysis to truly feel what the markets are doing."

So far we learned the two main types of studying the forex markets; namely the fundamental analysis and technical analysis. We also covered how traders can make use of sentiment analysis in order to understand the relationship between two different asset types or markets.

Now comes the question as to which of these methods are ideal for trading. Some argue that fundamental analysis is better, while others argue that technical analysis is better. But the truth is that in order to be successful trading forex, you need to make use of both fundamental and technical analysis.

This is because it gives you a full picture of the markets.

Fundamental analysis shows you the reasons why the price of a security is moving the way it is. Technical analysis on the other hand tells you what price could do, depending on how price behaved in the past.

Therefore, when you have the knowledge about the what and the why of the markets, you will get a thorough understanding of what is going on in the markets.

It might seem to be a bit difficult to make use of these two aspects. However, it requires practice in order to be able to tie in both these studies of the markets.

One argument that often comes up is when traders ask the reason for using fundamental analysis when they are trading the five minute chart. While fundamental analysis for trading a five minute chart might not seem that important, think about it for a while.

What if there is a major central bank decision that is coming up? If you used just technical analysis, there is a 50% chance that you will be right. But if you combined fundamental analysis in a way that you understand what is happening in the markets, you would be able to tell whether the central bank will be hiking or cutting interest rates.

Thus, based on this view you form from fundamental analysis, you are easily able to increase the probability of your trades by expecting what the central bank decision will be and then combine technical analysis into the outlook.

Another important aspect to remember is that the price of a security does not move because of technical analysis. The price of a security moves due to the fundamentals. Technical analysis will only tell you what price can do.

Sometimes technical analysis can also be wrong. This is because it is the fundamental analysis that plays a role in deciding what the price will do. Thus, if you trade based on just technical analysis, chances are that you will not be able to see the full picture of the markets.

Fundamental analysis, especially in stock markets is primarily used to value the price of the stock in question. Fundamental analysis is primarily used by long term investors. This is where the misconception comes into the forex markets.

Because forex traders are speculators rather than investors, the merits of using fundamental analysis alongside technical analysis is brushed aside. But this is not the case.

As we illustrated above, traders should always start with fundamental analysis before moving into technical analysis. When there is an alignment between the fundamental and technical analysis, you can expect to see big results.

Whether you are trading the 5-minute chart or a swing trader who holds the trade for a few weeks at a stretch, using fundamental analysis and technical analysis will help you from making mistakes in the market.

Once you are comfortable in using both fundamental and technical analysis, you can also make use of the inter market relationships such as sentiment analysis to true get the pulse of the markets.

By following a trading routine, you can automatically build a plan that starts with a fundamental analysis of the markets followed by sentiment analysis which will tell you what currencies are most likely to perform.

Finally, using technical analysis you can then use this study into the currency pairs of your choice and trade them accordingly. It might seem a lot of work, but once you practice enough, you will find that fundamental, technical and sentiment analysis are easy to incorporate into your daily trading routine.

Many beginners in forex tend to skip fundamental analysis which is a big mistake. This is one of the reasons why beginners lose money because they trade without the full knowledge about the markets in question.

Therefore, it is ideal that you start practice to use fundamental and technical analysis in your daily trading routine in order to pick more profitable trades.

Read 992 times Last modified on Thursday, 04 July 2019 11:24