Technical & Fundamental Analysis for Forex Strategies (Part-1)
Have you ever heard the name Martin Schwartz? Or Jim Rogers? Martin Schwartz is a seasoned trader known as a technician , a trader who only uses technical analysis. Meanwhile, Jim Rogers is a well-known trader who is based on fundamental analysis. How about you? Is your forex strategy based on technical or fundamental analysis? Then how far do you apply this method in your forex trading?
In this simple article, we will try to explore more deeply the two concepts of analysis. You are ready? It’s better, because this article might determine your choice. For example Scalping is one of the most popular forex strategies .
In analyzing, forex traders usually use two types of analysis. Those who focus on price movements and choose to ignore other factors choose to perfect technical analysis skills . Conversely, other groups who like to study economic data as one of the market driving factors will focus on fundamental analysis. There is nothing wrong with those two things. In forex trading, technical and fundamental analysis can both be used as a reference for your forex strategy.
Many traders combine fundamental and technical analysis to generate signals for forex trading. There are also those who only concentrate on one method of analysis, and it can be said that any method actually has advantages.
Schwartz and Rogers have a lot of disagreement in terms of analytical methods, but there are two things they agree on in trading: that mastery of emotions and discipline are the most important factors in trading.These two things are even more important than the chosen analysis method.
Differences in fundamental analysis and technical analysis?
Before we go further, it should be underlined that although the explanation of fundamental and technical analysis can be different from one another, it can be – and quite often – the output produced is the same: the decision to buy or sell.
For example like this:
One time the market showed sharp movements. Prices move up quickly.Traders who adopt technical analysis will look back at the chart, trying to find opportunities based on their trading system. Pay attention to whether the key resistance has broken or not. If all technical factors confirm that the price is indeed bullish, then he takes a long position.
Meanwhile, adherents of fundamental analysis will look for the cause of the sharp movement through – for example – the release of economic data. If the news or economic data released is confirmed as the cause of the price movement, he will also take a long position.
Now, it can be seen right ? Adherents of both different analytical methods can take the same position, namely buy.
What is the fundamental analysis?
Fundamental analysis is an analysis that tries to estimate price movements through economic data or news. Compared to technical analysis, fundamental analysis actually uses far more “tools”. Although traders generally tend to only use economic data releases and news, in fact fundamental analysis refers to many other aspects including political, legal, social and many other things related to human life. We know that what drives the market is humans, right ?
Fundamental analysis aims to find a relationship between the price movement and economic growth. Thus, this method is different from technical analysis which refers to PRICE MOVEMENT.
Although fundamental analysis has proven to be efficient, there are things you have to remember so that you don’t become “overconfidence”if you choose fundamental analysis as your forex strategy . Indeed, fundamental analysis can provide an “alarm” about the potential for further price movements, but this method CANNOT GIVE indication of WHEN correction will occur. If you become “too fanatical” to carry out fundamental analysis, you will tend to justify if one day your position is wrong and the market drags you into a loss. (see fundamental analysis on forexfactory calender)
The advantages of fundamental analysis for Forex Strategy
The advantage of fundamental analysis is the ability of this method to understand the CAUSE of price movements. Therefore, you can be more confident in opening a position, or maintaining a position as long as there is no data or news that can trigger a trend change. Therefore, in forex trading, fundamental analysis tends to work better for long-term trading.
In the next article, we will discuss what is technical analysis and what are the advantages.
(To be continued)