Fundamental analysis vs. technical analysis in forex trading: Nowadays, you can invest in the foreign exchange (forex) market through financial derivatives known as contracts for difference (CFDs). You can invest on an online CFD platform, where you can speculate on some of the world’s most actively traded currency pairs, without owning the underlying asset.
However, before you invest, it’s vital you undertake thorough research, gaining an understanding of the factors that can affect market prices, and the data you’ll need to analyse in order to make informed decisions. This is imperative because the forex market is highly volatile, meaning prices can fluctuate dramatically within a short period of time.
By doing sufficient planning and analysis, you will give yourself the greatest chance of making gains on your position in the forex market and avoid making significant losses.
There are two different types of analysis when it comes to forex trading — fundamental and technical. Depending on your trading style, you can decide which data and type of analysis you choose to incorporate into your forex trading strategies.
To help you to understand more about the two, we will compare both approaches in this article.
Keep reading to find out more.
Fundamental analysts look at a country’s economic health in order to ascertain the strength of its currency. This involves assessing key factors, including:
- Employment rate
- Gross domestic product (GDP)
- Trade balance
- International trade
These factors can all have a significant impact on the value of a currency pair, since a weakened economy denotes a weak exchange rate.
Fundamental analysts will also look to employ an economic calendar, to keep up to date with the scheduled economic events that take place annually. This could include election dates and the release of the Non-Farm Payrolls, for example.
By having these events plotted upon the calendar, a trader can plan ahead and devise a well-constructed strategy, to best profit from potential price movements.
Technical analysts are less concerned about economic data, and are instead focussed upon patterns that appear in the market. This involves studying a price chart and attempting to identify patterns, such as wedges, double bottoms and tops, channels, flags, head and shoulders, and triangles.
These will help to inform them of the best entry and exit points, based upon past performance — put simply, technical analysis is all about trends. Technical analysts will attempt to uncover said trends by using indicators, such as:
- Price action
- Resistance levels
- Support levels
- Moving averages
- Bollinger Bands
- Momentum indicators.
Which strategy should you choose?
Fundamental and technical analysis are two completely different approaches to forex trading. Used properly, both will provide you with insightful data, that will help to inform your future decisions within the market, and understand when best to enter or exit your trades.
Many of the most successful forex traders use a combination of the two as part of their trading strategy. This is because, whilst technical analysis can help you to make informed predictions about the future landscape of the market, the fundamental analysis provides you with a broader picture of the currency itself.
Some of the most popular ways to combine the two are:
- A combination of fundamental analysis and breakout trading
- Fundamental analysis and range-bound trading
- Implementing fundamental analysis and oscillators
When choosing which data you should analyse, you should take into account your trading strategy, experience and financial goals, to find an approach that best suits you. There is a multitude of resources online to help you to get started with forex trading. You could also set up a demo account, where you can practice trading without depositing your own capital.