The Pros and Cons of Using Technical and Fundamental Analysis in Forex

There are basically 2 main methods that Forex traders use to analyze the market. They are technical and fundamental analysis. Pure technical analysts will say that it is impossible to trade in the news, as the market moves so fast and any news out there the charts will tell you too. On the other hand, fundamentalists will say that only the news moves the market. Technical indicators are always the followers. So what methods should we use? To find out, we’ll look at the pros and cons of both methods.
Technical analysis involves tracking past currency price movements and usage indicators to help identify in which direction the current price may be heading. This analysis can be performed manually or automatically. Under the automated system traders use software (expert advisor) or robot to help them find business and identify entry and exit points. Technical traders believe that all the necessary information necessary to place a trade is contained in the charts.

Fundamental Analysis

The fundamental analysis focuses on fundamental underlying economic, financial, and political factors in determining the direction of a currency’s price. Fundamental traders believed that currency movements, if it becomes stronger or weaker, are related to the strength of the economy, financial and political situations. So key reports and news are important to them. News and reports such as interest rates, employment, trade balance and GDP are of great importance. Other information such as retail sales, durable goods, home sales and ISM will also affect the price movement.

Technical Analysis

Advantages

-It helps to provide specific entry and exit point for traders during trading.

-Carting can provide everyone an easy way to identify trends immediately. This is possible because the same data is also being observed by millions of traders as a result, if a large number of Forex traders do the same, this will potentially create a self-fulfilling prophecy of reinforcing the trends even more.

-It focuses on charts and indicators. It is undoubtedly the easiest and most accurate method used by many marketers so far.

-Charts and tools can also help point some time when a trend is about to begin or end. So, help traders plan their profits and stop losses more accurately.

Disadvantages

-If many traders place their stops around the same areas, this could prompt a reverse price move as it may potential allows larger players in the market to intentionally trigger these stops.

– The tools used are basically indicators of delay. It can be dangerous to rely totally on the assumption that the current price and trend will predict future prices. They usually do, but not necessarily.

-Really completely in letters means that you can not pick up other signs that can potentially change the trend.

Fundamental Analysis

Advantages

– Fundamental analysis increases our knowledge and understanding of the global marketplace. Hence it helps us to get a clearer picture of the overall health of the world economy.

– We can use fundamental analysis to explain some of the unexpected price movements. Hence know what drives the higher or lower prices.

-Major press release may someday ignite the movement of big prices when there is a big difference between expectations and actual results. If you can predict and capture this price move, it can be very profitable.

– FOUNDATION ANALYSIS is best used to predict long-term exchange rate movement.

Disadvantages

There is so much information that can easily be confused.

-It’s very difficult to use all this information to set a specific point of entry or exit for trade.

-Sometime short-term press release may provide a false signal and trick trader into opening a trade. This signal often develops a knee-jerk reaction in the market.

– Sometimes the information or news released may already have been released on the market. Thus, the information does not have a significant impact on the price movement.

– Requires a person with at least some basic background knowledge.

– News can sometimes produce dramatic and rapid price movement for a pair of currencies in both directions up and down as the Forex market tries to digest the news. Inexperience traders may find themselves stuck in a lot of losses.

Conclusion

In my opinion, there is no ideal or best Forex analysis method that will guarantee you a 100% results all the time. Technical analysis and charts will help short-term traders to make their decisions, whereas long-term traders will need to keep abreast of the latest economic news and currency data from the countries they are trading in. Note that these methods of analysis are Tools only. If used correctly, it can usually help you negotiate more effectively. This is why most Forex traders tend to use both analysis approaches to make trading decisions.

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