For any aspiring forex trader, one of the first things to embrace is a trading strategy. The strategy you choose to follow should comply with your trading capital, trading style, goals, risk aversion, and method to analyze the money market. Forex traders use two broad approaches to analyze the market.
The two are fundamental analysis and technical analysis, and one of the questions some traders ask is which of the two is better than the other one. The simple answer to that question is that both are good for trading because you need a reliable technical analysis to tell you when to trade and a likewise reliable fundamental analysis to describe why you should trade at that particular time.
Some traders choose to trade with one over the other, while many others use both concurrently for more profitable and accurate market forecasts. Below is a closer look at each of the two trading methods.
Fundamental Analysis in Forex Trading
Fundamental analysis in forex trading focuses mainly on the type of economic conditions that might influence a currency’s supply and demand. If there is an increase in currency demand or a decrease in supply, the forex trader should expect a rise in the currency price. On the other hand, if the demand decreases while supply increases, the expectation should be a fall in currency price.
The best way of analyzing the characteristic risks that affect a currency supply and demand is by conforming to the events or conditions of an economic calendar. The calendar clarifies the influence that a country’s economic weakness or strength has on its currency.
A currency strengthens if the economic outlook of its country is solid or positive, while the opposite happens when the economic outlook is downhill. A positive economic outlook also attracts more foreign and local investors.
Fundamental analysis is primarily suitable for long-term traders, and the most common fundamental analysis trading strategies for this method are news trading and currency carry trading. In news trading strategy, forex traders wait for the release of live economic news before they make their trades. Some traders open their trading positions before the news feed, but only if they know what to expect.
Currency carry trading strategy, on the other hand, involves high-yielding currency funds trading with a low-yielding currency. It is a popular trading strategy where the trader takes advantage of the difference between the high and low rates to make a profit depending on ye leverage amount used.
Technical Analysis in Forex Trading
Technical analysis focuses more on statistical trends and price changes of the currency. Unlike fundamental analysis, technical analysis is more suited for short-term forex traders. Technical analysts use different types of charts to study historical trends and patterns of the currency pairs to provide a future predictive value of the same. They do this with the hope that nothing much can change past trends and patterns.
Besides charts, technical forex traders also study the market prices using a variety of technical indicators. Technical indicators are formulas displayed below or next to the price charts to provide traders with more detailed information about several currency activities such as the trend, momentum, volatility, and the support and resistance levels.
The analysts use the indicators to confirm if the current market trend changes or moves towards the perceived direction. While some traders use more than one technical indicator to study the market trends, others use a single strategy at a go. The most popular technical indicators are
- Moving Averages
- Bollinger Bands
- Relative Strength Index (RSI)
- Parabolic SAR
- Pivot Points
Wrapping it up
It is not easy to tell which of the two is better than the other one, because they all have their purposes. Some traders, especially the long-term ones, prefer to use the economic calendar to influence their trading actions. In contrast, short-term forex traders prefer to read the charts and compare past patterns and trends o forecast their future trades.
The fundamental analysis explains the whys of a price movement while technical analysis determines the entry and exit currency points, thus helping you decide when to buy or sell. The best approach for effective and profitable trading is to blend the two as it allows you to get the best of each when the time is right.