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The term "analysis" can be daunting or deceptively simple for many novice traders. On one hand, some newcomers may believe they grasp its fundamentals — the classic "buy low, sell high" principle — and feel satisfied with that knowledge alone. On the other hand, others might feel overwhelmed, and worry that there are too many types of analysis that they need to figure out before becoming a full-fledged trader.
But as with many things, the truth is somewhere in the good middle. There isn’t just one way of analysing the market, because if the rules were that simple, anyone could do it. At the same time, it isn’t so incredibly complex that there’s no way for beginner traders to ever get around it. At its core, trading analysis can really be broken down the simplest into two types: technical analysis and fundamental analysis.
In this blog, you’re going to learn how to differentiate these two types, and what type of analysis you need for certain conditions. Hopefully, you can use this knowledge to better prepare for your trading journey and appreciate trading analysis — however simple or complex.
Technical analysis is like being a trading detective. It's about looking closely at things like price and how much is being bought or sold to guess what might happen next in the market. This method works on the idea that what happened in the past can give you clues about what will happen in the future. So, by understanding how price and volume have changed before, you can make good guesses about what will happen next.
In addition to price and volume, technical analysts use a range of indicators, including specific charts, to identify patterns and trends in the market. One such indicator is the Moving Average, which calculates the average price of an asset over a specific timeframe and uses that average to predict future averages. Another technical indicator is the Relative Strength Index (RSI), which measures the strength of a currency pair by comparing average gains and losses over a period. These tools help technical analysts make informed predictions about market movements and assist in decision-making.
The options are endless when it comes to technical analysis, and the deeper you get into analysing the market this way, the easier it will be to get the hang of the different kinds of indicators.
Fundamental analysis offers a different perspective. While technical analysts focus solely on indicator fluctuations, fundamental analysts take a broader, macro-level view of the market. They examine real-world conditions that influence the value of assets. They believe that things like the economy, finances, and other quality and quantity factors decide the real value of a currency. Unlike technical analysts who focus more on price changes, fundamental analysts pay more attention to how outside elements such as inflation and interest rates impact the market.
For example, a fundamental analysis of the market might work like this: if a country increases its interest rates, traders may be more inclined to buy that country's currency. But if a country's economy is doing poorly, its currency might lose value because investors might avoid it. This type of analysis considers factors outside the usual ups and downs of the market to make predictions about what the market will do next.
Here’s a side-by-side comparison of technical and fundamental analysis in Forex trading:
So, now that you know the difference between these two analyses, which one is better?
It might sound like a cop-out, but really, the answer is it’s important to understand both. You can certainly lean towards one kind of analysis, but ultimately, knowing both technical analysis and fundamental analysis will help you become a more complete trader. Even if you specialise in one kind of analysis, having a base knowledge of the other kind can be a useful reference point. For instance, if you have a hypothesis formed out of technical analysis, you can use fundamental analysis to help support or push back against your working theories.
If you’re still a bit on the fence about which to apply, perhaps consider starting with a mixed approach where you can begin with fundamental analysis to help you survey the global conditions affecting the market, and then use technical analysis to fine-tune possible entry and exit points for trades.
Trading analysis is paradoxically both more complex and more simple than people might give it credit for, but categorising it into fundamental and technical is a good baseline for developing an approach to understanding the Forex market. Remember, while you can definitely choose to specialise in one type of analysis, it’s very useful to understand both types. Mastering both technical analysis and fundamental analysis can help compensate for the shortcomings of each, ultimately allowing you to make wise and informed decisions about when to enter and exit trades.
