Two of the most commonly heard terms in forex trading are technical and fundamental analysis. Most amateur traders tend to encounter these terms when forex strategies are being discussed.

Why are these terms so significant in forex? What is the difference between the two?

Technical Analysis

When a trader does technical trading, he somehow gets into the market’s mind to see what it may possibly do. His actions are based on historical data instead of using current news reports.

He predicts price movements and future trends by looking at previous market charts. He considers trading volume and instrument prices.

Most traders love doing technical analysis due to the idea of all fundamental analysis and news are priced into charts.

The forex market runs 24 hours so there are large amounts of data that can be studied by traders.

Why Technical Analysis?

Technical analysis is not too complicated in the sense that it only considers one factor – price movement.

All information necessary is found in a glance: whether prices are moving (or not), if prices are trending, and those trends’ strength.

Technical analysis also costs less than fundamental analysis, and is less tedious as well.

Within five minutes, the process can be finished, and usually, these services are often provided at no cost.

Fundamental Analysis

In comparison, fundamental analysis considers various factors such as events, policies and opinions possibly affecting a currency’s future value.

A trader who does fundamental analysis looks at a financial instrument’s economic conditions. He focuses on announcements made by the Central Bank and the Economic Calendar.

A fundamental trader uses political, economic, environmental and other significant factors and data that have the capability to affect the financial instrument’s supply and demand.

Benefits of Fundamental Analysis

 Fundamental analysis isn’t really easy, and is preferred by those who look for long-term trends.

This type of analysis is built on the premise of studying an entity’s economic well-being and having it prioritized instead of its price movements.

Certain traders prefer to choose fundamental analysis because they think this is a more stable way of ‘prediction’; a lot of factors are being studied, and this makes them more confident in trading.

They wish to have more information to make a decision instead of having their next move based on the previous price trends.

Which Is Better?

Technical and fundamental analysis have their own perks and pitfalls, however a trader doesn’t have to focus on one strategy to succeed in forex.

What he can do instead is to mix techniques from both methods and enjoy the best of both worlds. They’ll use combined information to plot their entry and exit points.

Between fundamental and technical analysis, there really is no “better” method. Either of the two could be used depending on your style and preference.

If you’re more of a long-term trader who has real time access to economic data and news reports, then you’re suited for fundamental analysis.

Yet, if you’re a short-term trader who has information about quotes and financial analysis, then it’s better for you to go down the path of technical analysis.

Tips on Using Technical Analysis in Forex Trading

Technical analysis has become a popular method for currency traders to detect trading opportunities.

This type of analysis relies on price data and is based on the assumption that price activity will eventually form into trends.

Once a trader identified these trends, he can use them to find entry points for trades.

The basic tool that is used to identify trends is charts, which visually represent the movement of price data. There are three basic chart types:

• Line charts. These charts track just one piece of price data, generally the closing price for a particular trading period.
• Bar charts. These charts use two data points, the opening and closing prices of a currency pair.
• Candlestick charts. This is the most popular chart type since it includes four points of price data. Apart from the opening and closing prices, the chart also monitors the highest and lowest price during the trading period. Each trading period is represented on the chart by a ‘candlestick,’ a bar with a ‘wick’ on either side. The wicks measure the highest and lowest price while either end of the ‘candle’ represents the opening and closing price. This is the chart most frequently used by traders and the one you should learn how to use, even if you decide later that another chart type would be more suited to your trading style.

Here are some tips for traders using technical analysis:

• Be aware of political and economic developments of the country whose currency you are trading. These developments can affect the value of the currency such that monitoring price data alone will not indicate the trend it will follow. For example, if the country is about to hold an election, prices may be stagnant as investors wait and see which way it goes before making a move. In this case, you should not hesitate to close your position in a currency, even at a slight loss, if the country seems like it is about to experience instability. This can prevent you from suffering from more serious losses later on if you hold on to your position.
• Watch out for what others are saying. Read political blogs and trade publications to see what their analysis is so that you can decide what actions you should take. It is important that you are proactive with your traders and not just open a position, wait for it to mature, and then close it to make a profit when the price has gone up. You need to be informed at all times so that you can move to prevent losses or lock in profits.
• Network with other traders. This is useful in helping you determine general market sentiment. For example, there may be some traders who are warning about conditions in a particular country, which may be an indication that you need to move your investment into another currency. While information is important, just as important is analysis and getting many points of view can help you get a clearer idea of what trading decisions you need to make.

Source: MTrading, An Egypt Forex trading broker.