Technical & Fundamental Analysis: the Diffrences
Anyone who ventures into forex trading, sooner than later, will encounter the terms fundamental analysis and technical analysis. These are the primary tools for scrutinizing market movement and currency trends.
The prevailing view is that market analysts and traders fall into either one of these categories, although there are those who believe that the difference is minimal at best. Regardless, before going further into the forex, you need to know something about these two analyzing tools and their distinguishing characteristics.
Fundamental analysis accumulates economic data to track and forecast possible price trends isn the currencies market. Taking into account Gross Domestic Product (GDP) figures, major company earnings reports, central bank statements and policies
(particularly the rates) and prospective employment numbers, the fundamental analyst can create models based on these figures. These models can serve as a means for studying the forex market and its implications on the curencies.
While fundamental analysts rely on external factors, technical analysts work with figures internal to the market itself. Most technicians believe that factoring in external influences are unnecessary because price movements fall into patterns. While investor sentiment on an unexpected event (such as an unstable political situation or natural calamity) can affect currency prices, the behavior of market investors fall into patterns themselves.
More to the point, technical analysis believes that by studying the past history of the price currency, repeatable patterns can be seen. By figuring out the signals that imply a change in the pattern, price movement can be predicted.
In lieu of economic indicators, technicians rely on technical indicators to forecast the forex market. Various tools are used to perform currency gauges. Price charts are common, but other more sophisticated utilities include Moving Averages (for observing trends), Bollinger Bands (measuring forex volatility), Elliot Waves (indicates the patterns in the market) and RSI (Relative Strength Index, useful for determining currency momentum).
These are some of the basic differences between fundamental and technical analysis. The question of which is "better" or "more reliable" is perhaps moot. The fact is that nowadays, it is becoming difficult to distinguish between the two.
The fast paced developments in world affairs and economy makes it almost impossible for a technical analyst to ignore them. At the same time, a fundamentalist cannot disregard the trends and figures on the charts. Technical analysis is ssaid to be excellent for short term trends, while fundamental analysis is good for the longer term.
Both methods have their uses, and for the trader the best option is to use them both, one at a time, or simultaneously, depending on the situation. By persevering and studying these methods, you will be able to get the best of both.