In trading as a whole including Forex, there are two approaches used by the majority of traders to read market movements, namely fundamental analysis and technical analysis.
Both are very different, but each has its advantages, and when used properly, both analyzes will provide a broader picture of market conditions.
Finex provides comprehensive, fundamental and technical analysis.
Fundamental Analysis
With fundamental analysis, we study the state of a country’s economy through the factors that influence it. In Forex, the fundamental factors that affect currency values include employment rate data, inflation rates, interest rates, GDP data, and much more.
In very simple terms, when the economic condition of a country is good, the value of its currency tends to rise. On the other hand, poor economic conditions go hand in hand with a weakening currency.
Supply and demand determine currency exchange rates. Economic news and reports become the market’s reference which then affects the demand and supply waves.
Technical analysis
This one is different. Technical analysis is used to make predictions based on historical data from price movements. This analysis helps us to understand the level of opening a transaction – from which level the price will change during its movement. The best way to observe the rise and fall is through a chart.
Technical analysis is the basis of studying price movements based on patterns and statistical data from the past based on information on charts, as well as providing an overview or possibility of future market movements.
In the process of studying it, we shall understand the graphs that are generally used frequently. In this analysis, we should prioritize the basics such as rhythm, flow, and trend of price action.
Currently, technical analysis is easier to do thanks to the existence of a trading platform that is equipped with features to display price movements in various types of charts, as well as various technical indicators as tools.
Difference between Fundamental and Technical Analysis
If you still can’t grasp the difference between the two, here’s a summary of the factors that separate fundamental and technical analysis:
- Fundamental analysis refers to the substantial factors and indicators that affect the economy of a country and the industry in it. While technical analysis deals with indicators, signals, and charts.
- Technical analysis is very useful for short-term transactions. In fundamental analysis, we need a longer time, so fundamentals are often applied by traders or investors who look far ahead (years).
- This timeframe difference affects our goals as traders or investors. Technical analysis seems to be more aligned with “trading”, while fundamentals are more oriented towards “investing”. This may seem like a difference in terms, but in reality more investors are using fundamental analysis to buy or hold company shares. While traders who tend to rely on technical analysis use it to generate short-term profits.
- Therefore, technical analysis is often used by swing traders and short-term day traders. On the other hand, fundamental analysis is the mainstay of long-term position traders.
- In technical analysis, decision making is based on market trends and price action. In fundamental analysis, decision making is based on available qualitative information.
- In technical analysis, only past data is considered. Whereas in fundamental analysis, the data that is used as a reference is past and present data.
Combining The Two, Is It Possible?
Very likely.
Combining the two strategies can help us to better understand the market and gauge investment direction.
Imagine, you use fundamental analysis to study the intrinsic value of the asset you want to buy, how profitable it is. So, when is a good time to buy? This is where the role of technical analysis, where we can know when is the best time to enter or exit a market, because this analysis can confirm trends.
In addition, we can create a “buy list” of the assets we want and analyze them based on fundamentals to find out their prospects, then use technical analysis when deciding to buy or not.
Which is More Accurate and Better?
This is a debate that can take a long time. We will close it briefly.
Each form of analysis has its own advantages and places. Referring to the differences that have been described, you yourself can choose which one is more suitable for you. In addition, the combination of the two can also provide maximum function, especially for medium-term and long-term investments.
Price movements are determined by supply and demand, which are influenced by factors that usually enter the realm of fundamental analysis, such as market sentiment and the influence of emotions on market activity.
On the other hand, charts cannot be used to determine whether an asset is undervalued or overvalued, as well as how high it will be in subsequent years. Always remember that charts reflect what has happened in the past.
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