Technical vs Fundamental Analysis in Forex
WHAT TYPE OF TRADER ARE YOU?
In the world of forex trading, every trader has his or her own unique trading strategy. However most trading strategies can be grouped into two major categories: fundamental or technical. In this blog post, we will look at what each of these categories is and the advantages and disadvantages of each.
TECHNICAL ANALYSIS
Technical analysis involves price pattern recognition on a chart. Technical traders look for price patterns such as double tops, head and shoulder, and flags. Based on the pattern, a trader will determine the entry and exit points. Unlike fundamental traders, a technical trader is not as concerned about why something is moving because the trends and patterns on the charts are their signals. Below is an example of popular price patterns and how a trader would normally trade them.
A technical forex trader will assess the price action, trend, support and resistance levels observed on a chart. Many of the patterns used in technical analysis of forex markets can be applied to other markets as well.
FUNDAMENTAL ANALYSIS
Fundamental analysis involves assessing the economic well-being of a country, and by extension, the currency. It does not take into account currency price movements. Rather, fundamental forex traders will use data points to determine the strength of a particular currency.
A fundamental forex trader will analyze the country’s inflation, trade balance, growth in jobs and even their central banks benchmark interest rate. Below is an example of an economic calendar which fundamental analysis traders would normally use to keep to date with any expected trading news.
By assessing the relative trend of this and other data points, a trader is analyzing the relative health of the country’s economy and whether to trade the future movement of that country’s currency.
So Which Trader Are You?
In conclusion fundamental and technical analysis involve very different strategies and approaches to trading; offering unique value and insights to support trading decisions, and when to enter or exit a trade. While some traders prefer to use these types of analysis separately based on their preferred trading style and goals, many use a combination of the two.
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