There are some experienced Forex traders that swear by fundamental analysis and while others will tell you that technical analysis is the safest bet. The preferences are based on their experiences with the different kinds of trading analysis. There are pros and cons to using each type of analysis. As a trader you will need to decide whether you want to choose to base your decisions on fundamental analysis, technical analysis or both.
What is the difference between fundamental and technical analysis?
Fundamental analysis is the favorite of those currency traders that have been in the market for some time. It is generally not the option taken by newbies since it requires a keen understanding of the various economic, political and geographic aspects that affect currencies. Fundamental analysis is considered to be extremely difficult since the numbers of factors that can impact a currency are many.
Fundamental analysis involves interpreting global financial news, especially that which is related to currencies. Old financial events taking place in a local country directly affect the price fluctuations of the currency. The amount of time required to do proper fundamental analysis is lengthy and explains why many retail traders are unable to compete with large institutions that have more immediate data at their disposal at all times.
Technical analysis is statistical in nature. It depends on past trends and movements to predict the future currencies price moves. One can define the natural range within which two currencies will move and therefore allows for a limited field of play. When you choose investments or trades on the basis of technical analysis, you can focus on a few indicators and allow yourself to make decisions based on the trend lines that the analysis indicates. For example, support and resistance levels can be calculated based on the Fibonacci retracement ratios. These trend charts are easy to create especially with the aid of Forex trading platforms and applications.
It would be difficult to acknowledge which analysis is better for Forex trading. Both approaches help when making Forex trading decisions. However, neither study works all the time and mistakes occur using either one of them. The best method is to use both types when the need calls for them.