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Lesson 12: Fundamental and Technical Analysis

Fundamental and Technical Analysis, Forex, Forex course, Forex for beginners

Technical and Fundamental Analysis, Forex, Forex course, Forex for beginnersIn the previous article about the commodity currencies, I left you with a question: fundamental or technical analysis? Fundamental analysis and technical analysis represent the two different approaches to which reference can be made when we make trading in Forex (and not only). The first has to do with the so-called fundamentals of the economy, and then with the essentially economic aspects of the issue, while the second focuses particularly on the price movements of a currency pair to intuit and predict its subsequent movements.

Both fundamental analysis and technical analysis are useful in Forex: the two approaches can also be used together, for analysing financial market trends satisfactorily and profitably.

 

The Technical Analysis

Technical analysis is the study of price trends with the use of charts. The interest of a technical analyst is to look for the graphics configurations that are drawn by price movements. The market trend is evaluated to understand possible future price movements.

The pure technical analysis is not based on any fundamental of the underlying activity but applies a series of technical tools drawn on the chart, to allow for future movements to be forecast.

The tools available to a trader who wants to achieve this goal are many: among these, there are the trading indicators, which are specific mathematical formulas that represent the factors that affect the price of a particular asset from a graphical point of view. A technical analyst can understand, only by looking at the charts, whether in the short-term, in the medium-term or the long-term, a currency pair is destined to fall or rise.

 

The Fundamental Analysis

When we talk about fundamental analysis, we refer to the discipline that focuses not on price charts but the so-called macro-economy, that is to say, that part of the economy that has to do with the forecasts on fundamental factors.

The price trends of a currency pair, in fact, also depends on political events, economic crises, wars, acquisitions of companies and multinationals, the news published on specialised media, market rumours and so on. Based on this approach, therefore, traders have the opportunity to understand and know the economic aspects on which price trends depend and then exploit them and make money.

 

Statistics and Chart

The first difference between fundamental analysis and technical analysis is that for the first analyst it is necessary to examine balances and statistics, while the second refers essentially to charts.

Hence, a fundamental analyst focuses on economic theory and related accounting, econometric and statistical methods: it is an approach that, as we can guess, is based on a longer period of time compared to the horizon of technical analysis.

The technical analysis, to be honest, can be set to different time-frames, a few minutes or even years: for fundamental analysis, however, there is not the same freedom of choice, as the data must be interpreted over time. Fundamental analysis and technical analysis, in essence, are concepts and ways of understanding Forex almost at the opposite, but it does not mean that they cannot coexist: indeed, usually the best traders on the market are those who are able to combine them in a winning way.

For example, the tools of technical analysis can be useful to a fundamental analyst to give him the opportunity to understand when is the most suitable time for entry into the market (the timing). On the other hand, a technical analyst can decide to use, in addition to technical signals, also the economic fundamentals, perhaps understanding if the suggestion to sell that can come from a pattern on a chart is also supported by the fundamental data.

 

Features and the differences

At this point, there is nothing left to do but to examine the other differences and the other characteristics of the two types of analysis, starting from the importance of timing: this element, which is very significant for a successful trader, can be understood as the best time to enter the market. With the right timing, the stop loss that may result is minimal, which corresponds to a higher chance of winning and a reduction in losses.

The study of the charts (and therefore the technical analysis) allows us to understand the key levels of the timing. Another factor that deserves to be taken into consideration is that, sometimes, an event can already be taken in the price. In the sense that fundamental analysis is incorporated into the technical analysis. In other words, within the charts are priced all the elements of fundamental analysis (the ones we mentioned earlier: political events, economic crises, and so on).

Furthermore, it is worth pointing out that the fundamental analysis is less flexible than the technical analysis, which allows to focus on stop losses and, above all, to program the various objectives for the most different time-frames.

Last but not least aspect is that which has to do with the ease of finding information: many news, in fact, is difficult to find, which complicates the task of a fundamental analyst, even more so if it is a common investor.

However, we must not make the mistake of believing that for long-term investments we must opt for fundamental analysis, while for short-term investments we must opt for technical analysis. A division into watertight compartments of this type it is neither fruitful nor correct since, with the appropriate measures and adequate knowledge, both the techniques can be useful in the short, medium and long-term.

 

Which approach to use?

You cannot establish a priori what the best or wrong approach is: there are many professional traders who, as purists, prefer not to mix the two analyses.

What is certain is that both points of view guarantee some advantages: to follow the macroeconomic signals without taking into consideration the technical ones would be a meaningless extremist attitude. And, of course, it is true the vice versa as well, that would lead to depriving ourselves without reason of useful information.

The secret of a trader, therefore, is to know both the technical analysis and the fundamental analysis, to master both and use from time to time what he considers most appropriate to the circumstances.

 

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