Which market analysis is the best?
Some people may tell you that neither a technical nor a fundamental analysis alone is adequate, and the truth is somewhere in between.
The ultimate question?
You might have heard about a technical and fundamental market analysis, or you might be able to find out about it right now. The age old question is whether a forex strategy should be based on fundamental or technical analysis principles.
The debate between traders may continue indefinitely, but the truth is that there is no single answer. From time to time some sources even claim that neither a technical nor a fundamental analysis alone is adequate, and the reality is somewhere in between.
What is technical analysis?
Technical analysis is the ability to read the charts of financial instruments. The chart saves the price movement and presents it in the form of a graphical historical data. When we observe a chart we can find certain patterns that have been repeated many times in the past.
According to the theory of technical analysis, if a model has been observed in the past and followed by a decrease or increase in price, then the same thing is very likely to happen in the future. In this regard, the basic principles of technical analysis are that (1) all the information available to market participants is already reflected in the price, (2) markets tend to form price movements, called trends, (3) history always repeats itself, and that (4) there are no eternal trends - sooner or later there is a correction of the trend and a change in the direction of price movement.
Technical analysis is an extremely universal tool for forecasting price movements. We can use it on any time frame of the chart. Whether we monitor the cost of a one-minute, one-hour, 4-hour, or daily timeframe, technical analysis can be applied equally well. It can also offer clear rules, on which to base our buy or sell signals. As said at the beginning, this is the basis of any successful forex strategy.
What is fundamental analysis?
Fundamental analysis, on the other hand, does not deal with chart graphics and historical price movements. Its purpose is to predict whether a particular currency will appreciate or depreciate based on macroeconomic news about it.
This includes, for example, news related to changes in the monetary policy of the central bank behind this currency, changes in economic growth, unemployment, inflation, key interest rates, gross domestic product, but also political risks associated with the country which uses the given currency as a means of payment.
Sometimes fundamental analysis can be more complex to understand and apply than technical analysis. If they do not have the relevant basic economic knowledge, novice traders may not be able to distinguish important news from less significant news. For fundamental analysis, we must say that its basic principles work best in the long run. It needs to be analyzed more carefully by traders who hold positions for more than a week. However, this does not mean that if you use a scalping strategy or day trading, you should ignore the fundamental analysis. On the contrary, it is the news that has the power to move markets in one direction or another. Sometimes in the minutes around the announcement of a news item, the price can move significantly up or down in seconds. If you use a scalping strategy and you do not know when important economic news will be announced, then you are at risk.
The Forex market prices rarely goes only up or only down. It shifts constantly, even a few times a second. If we look at things a little on a broader scale, we can find that the market has a "habit" of creating longer-lasting patterns of appreciation or market depreciation in every financial instrument. Once you choose a forex strategy, it's time to make effort to develop an overall trading plan, because the trading strategy is only part of the trading plan. The rest are rules for risk management and building a trading psychology.
Even the greatest Forex strategies and analyses do not deliver successful outcomes if you don't know how to handle account losses, how to unlock the potential of winning positions, or how to control your emotions.
Related article: What is trading psychology?