Forex Trading Strategies - The Difference Between Fundamental Analysis and Technical Analysis
There are two common types of forex trading strategies:
- Fundamental Analysis
- Technical Analysis
Although investors of different types will evaluate and analyse both of these systems, the truth of the matter is that they are very different.
Here is further analysis and breakdown of both fundamental and technical analysis forex trading strategies.
What is Fundamental analysis?
The first thing to look at with forex trading strategies is what is most commonly referred to as fundamental analysis. With fundamental analysis, traders analyse the market and measure currencies based on a variety of different fundamental factors. These factors are often much more calculated, while, as you’ll read later, technical analysis looks more at patterns and price movements.
When an investor uses fundamental analysis, they look to the intrinsic value of currency. They can do this by looking at industry conditions and the economy, as well as management and condition of particular companies in an economy. Those interested in fundamental analysis also look at earnings, assets, liabilities, and expenses of an economy, in order to help them get a better idea of what could happen in the near future.
What are the advantages of fundamental analysis?
One of the first advantages of a fundamental analyst is that investors immediately have all of the information that they know right on the table. They can look at economic indicators and expectations and then make moves based on what they think will happen to the values of the currency. In addition, fundamental analysis puts a strong emphasis on patterns based on the calendar. For example, many economies have shown common patterns from year to year, which can be used as a helpful way to determine whether or not it should be invested in.
Many will argue that the fundamental analysis of Forex trading is much more likely to pay off in time. However, that’s not to say that it doesn’t come with its downsides.
What are the disadvantages of fundamental analysis?
As mentioned above, fundamental analysis of Forex trading is likely to pay off in time, but not necessarily anytime soon. Many experts say that fundamental analysis of foreign exchange takes too long to evaluate. In some cases, a person may make the evaluation and it could take quite some time before the expectations occur. This means that they’ll have to hold out for a much longer time than with other methods.
In addition, the process of fundamental analysis is said to take too long and can be time consuming and tedious. Most investors want to turn around their results as quickly as possible. Therefore, they don’t want to waste the time that is often required in order to consider the economic indicators that come with this process. If expectations are not met, some investors may also leave early, which can harm the overall process of the investment to begin with.
What is technical analysis?
On the opposite end of the spectrum of fundamental analysis, technical analysis looks at possible price movements in the future as a way to predict patterns that couple result in financial gains. Those that rely on this type of investment have a variety of different types of graphs, and they are able to use this evidence that they have in order to make market predictions. While technical analysis typically looks at the current intrinsic values, technical analysis look at Bollinger bands to see how quickly a prove moves and what happens when it breaks out of an expected guideline. It also helps to determine how long it’ll take before band comes back to its original status. Many technical analyses assume that the tighter a band is, the more likely it is that a big move is coming in the future.
What are the advantages of technical analysis?
The advantage of technical analysis is that it’s truly one of the most revealing ways to evaluate foreign exchange. After all, the price never lies and you have exactly what you need in front of you. In addition, the greatest advantage may be the fact that it can be done incredibly quickly, in comparison to the fundamental analysis method. By looking at trend analysis and moving averages, technical analysis is often thought to be done very quickly and therefore it is considered to be an advantage by those that want quicker returns.
Furthermore, it’s important to keep in mind that technical analysis is well established. Many people have used technical indicators, such as the RSI, for quite some time and been pleased with the results that they get in return. Another benefit is the fact that there is no slow stochastic guesswork necessary. In all, many people believe that technical analysis has fewer downsides than fundamental analysis.
What are the disadvantages of technical analysis?
A disadvantage of technical analysis is that it can be very hard to understand and master. For example, understanding Fibonacci numbers can be very difficult to comprehend for those who have never been educated with it before. It requires for your predictions to be reliable and accurate, or else they could be completely off altogether. In some cases, technical analysis is also thought to be subjective. With this mindset in place during the analysis of a foreign currency, the numbers may not be as truthful as they are assumed.
Which is best for forex trading?
The truth of the matter is that each person is going to have their own ideas for what is best for foreign exchange investing and when it comes to trading/investing there is no real right or wrong answer its just a matter of what each person thinks they might have more success using or have had success with in the past.
For some, the ideas and concepts that come with fundamental analysis may be easier to grasp. On the other hand, technical analysis may be more interesting for those that are eager to get involved as fast as possible and is the one that is often easier to grasp because it doesn’t involve extensive research. It’s basically just reading charts and graphs etc while fundamental analysis can often involve lots and lots of research into financial data, economic data, interest rate data etc.
Whatever the case may be, it’s important that investors find forex trading strategies that is best for them and then develop a process that helps them with the best Forex investing possible.
Do Forex Strategies Impact Making A Forex Broker Comparison
Forex trading strategies can impact three areas of trading:
- How often you trade
- How much leverage you need when trading
- How impacted you could be by slippage
Brokers that trade regularly and hold positions may have greater exposure to the fees and spreads charged by brokers. These forex traders should ensure they find a low fee forex trading Australia account. Other traders may trade less frequently but want to have greater exposure when they do trade. A high forex leverage broker which can offer leverage of up to 500:1 is more suitable for these Australian FX traders. Finally, some strategies may focus on key trading periods when sudden movements in currencies may occur. These are the same periods when slippage may occur so finding a broker has a strong IT setup and that is Australian forex broker accredited is a must.
You can read more about trading forex, stocks and other commodities at All Stocks.