When trading, there are two principal categories under which investors analyse the forex markets in order to take trading decisions. These two principal categories are fundamental analysis and technical analysis.
Let’s take a brief look at both categories:
Technical analysis is a way of analysing the fx market by looking at price action. It is a way of forecasting future price movements by analysing past price movements. Technical analysts use charts and other tools to attempt to identify patterns within the price action.
The underlying basis to technical analysis, is that the price, in this case of the currency, already reflects everything that could impact on the price. This means that there is no need to consider factors separately, such as economic data or geopolitical events. Technical analysts believe that the market moves in trends, be those short term, medium term of long term, and that history tends to repeat itself. In other words, price action has a repetitive nature, which make it possible to predict future movements.
Unlike technical analysis, which considers price patterns, fundamental analysis is a method of looking at the forex markets by analysing key factors which could impact on the supply and demand of different currencies. It is a way of understanding the dynamic of a market, the factors which strengthen or weaken a currency.
Fundamental analysis aims to provide a more holistic picture in order to build an understanding of the strengths and weaknesses of the currency or currency pair. Key factors which could affect the supply and demand of a currency, and therefore its value include, economic, politics, natural disasters and social factors. In other words, fundamental analysts use all the information available to them to gauge the strength or weakness of the currency.
Technical vs Fundamental
Both types of analyses are useful for examining market action. Fundamental analysis looks to understand the causes behind what drives the forex market, this tends to be associated with longer term trading. Meanwhile technical analysis can provide more detailed entry and exit points and tends to be more associated with short term trading. Your trading style and the length of time that you are looking to hold trades could indicate which type of analysis is best suited.
Whilst some traders will stick to one category religiously, which is single method approach, others will combine both fundamental and technical analysis in order to take trading decisions.
Whether you choose technical or fundamental analysis, or a mixture of both, it is important to use a broker which provides you with the necessary tools to carry out the analysis. Vantage FX is an award winning Australian forex broker. The provide their clients with a comprehensive charting package, plus MT4 meaning that their clients can perform comprehensive technical analysis. They also give their clients access to a updating news feed and commentary meaning that clients have the potential to stay up to date with FX news.