Choosing between Technical and Fundamental Analysis
Every newcomer comes to Forex waiting for the big money. It seems to him that all he has to do is deposit money into his account and open a deal, and it will immediately bring him a huge profit. But in life everything is much more banal. Forex, like any other activity, requires certain knowledge.
Before you open a position in the market, you need to clearly define for yourself in which direction it should be done to make the trade profitable. Opening a position based on intuition is a great way to quickly lose your deposit and become disillusioned with the market forever. forex trading. Experienced traders never act on instinct; they use a very tangible way of "diagnosing" the market, which is called analysis. Market analysis is the first thing a trader has to do to develop his strategy and determine the direction of his trades (forex analytics). In this article we will discuss two types of analysis: technical and fundamental, which are necessary for successful trading.
Technical analysis (TA) involves predicting the movement of quotes based on past price movements. TA is based on several basic axioms:
- Price takes everything into account. This axiom implies that the price changes depending on political, economic and other factors, that is, it takes them into account.
- History repeats itself. Past price behavior and its behavior at certain price levels, as well as the patterns formed by the price based on historical quotes, make it possible to predict future price behavior. The method works effectively because people usually tend to react in a certain way to a particular situation.
- You can see a trend in price changes. The price does not move chaotically, there are usually periods of its growth or decline, which come to replace each other.
There are many different methods for performing TA. Some traders use technical indicators, others use graphical analysis or make predictions on candlestick combinations. Despite the abundance of existing methods, TA has a high level of subjectivity. Looking at the same chart, different people can make completely different predictions. Someone will decide to open a deal, and someone will decide that it is not the right time yet. To a large extent, such polar decisions are due to the fact that traders use different methods of technical analysis.
Fundamental analysis (FA) allows you to assess the prospects of trade on the basis of so-called "macro" factors. These include:
- Economic factors. These are GDP indicators, statements of central bank governors, interest rates, unemployment and inflation rates, etc.
- Political factors include elections in countries, political statements, changes in the political situation, etc.
FA is a rather complicated kind of analysis, usually engaged in large companies, so it is difficult for an average trader to predict the development of the situation, based solely on fundamental data. Usually he gets the information available to the general audience, and all the pitfalls remain hidden from view.
Nevertheless, there is basic fundamental analysis data that can greatly help in trading. When news about changes in these factors are released, the market always reacts to them, which can be used by the trader. In order to know the time of news release and the data on a particular indicator, one uses the so-called economic calendar.
After studying both types of analysis, it is recommended to first open a demo account and practice on it, and then, only after achieving the results, to move to a real account, starting trading from a "clean slate". It does not matter what kind of broker you have chosen to trade (AMarkets or any other company), the demo account is the same everywhere and you can start trading right away.
Which type of analysis should I choose?
The choice of one or another type of analysis depends on a number of factors, here are some of them:
It should be said that the choice of the type of analysis directly depends on the psychological peculiarities of the trader. Some people are more creative, they like the humanities, and it can be difficult to evaluate their work according to precise criteria. Others are inclined to mathematics and the exact sciences. They like to operate with precise numbers and get specific results. In their work they strive for maximum automation. Obviously, the first ones will choose the fundamental analysis, and the second ones - the technical analysis. The first ones want to be informed about the actions of the central banks and the Federal Reserve, and the second ones prefer to assess what they see with their own eyes - the price chart.
The choice of the type of analysis also depends on what time intervals are being traded. Fundamental data is usually formed over a long period of time, so it makes no sense to rely on it for intraday trading. For such trading it is better to use indicators or other methods of technical analysis.
Combining TA and FA
In fact, few traders think about which type of analysis to prefer. Experienced traders perfectly understand that the best result gives a combination of TA and FA. Fundamental information confirmed by the technical analysis data multiplies the chances for success. Very often traders working with technical analysis on short time intervals trade on the news, getting an additional opportunity to earn. If you have a good understanding of both technical and fundamental analysis, it only increases your chances for success. Thus, everybody should begin his first steps in trading with studying the basics of market analysis. Otherwise, very soon you will have to be disappointed.