Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. Technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. There is a great debate about which type of analysis is better for a trader. Is it better to be a fundamental trader or a technical trader?
Technical analysis is essentially a study of price movements. Trades are made on the basis that historical currency data can provide an indication as to how the market will perform in the future. The basic concept is that traders believe that all available market information is contained within the currency prices, and can be revealed by an in-depth analysis of movements. This analysis, and the information that it yields, is thus used to make trading decisions.
Technical analysis is simple and straightforward, with tools available to everyone from the seasoned hedge fund manager to the novice retail trader. In addition, technical tools are easier to interpret than fundamental indicators, the understanding of which usually requires a period of diligent study. Finally, since technical analysis focuses on the price action exclusively, the technical trader has only one needle in his compass: the price, on which any calculation about profits or losses must be based.
Fundamental analysis is less of a science, and more of an abstract principle. It works by identifying economic, social and political events that may impact the market and hypothesize the manner in which they will impact supply and demand, and thus prices. Factors that are studied can vary from macroeconomic indicators like economic growth rates or interest rates to unemployment figures or political upheaval.
The greatest benefit derived from the study of fundamental analysis is the ability to understand the causes that drive the market action. By understanding market dynamics, we can be confident in maintaining a position as long as the cause that triggered the trade exists. A thorough grasp of fundamental analysis also ensures that we do not lose our composure in the face of market volatility. Those who employ fundamental studies in gauging the price action are confident that they are on the tracks of the greatest geniuses of forex trading.
