There are basically 2 primary methods that Forex traders use to analyze the market. They are technical and fundamental analyzes. Pure technical analysts will say that it is impossible to trade on the news because the market is moving so fast and whatever news there will be told in the charts. On the other hand, fundamentalists will say that only the news moves the market. Technical indicators are always the followers. So which methods should we use? Let's look at the pros and cons of both methods to find out.
Technical analysis includes tracking currency price movements and the use of indicators to help determine in which direction the current rate is possible. This analysis can be performed manually or automatically. Under the automated system, traders use software (expert advisor) or robot to help them find transactions and identify entry and exit points. Technical traders believe that all required information needed to place a transaction is included in the graphs.
Fundamental analysis focuses on important underlying economic, financial and political factors to determine the price direction of a currency. Fundamental traders believed that currency movements, whether they become stronger or weaker, are related to the power of the economy, financial and political situations. That is why fundamental reports and news are important to them. News and reports such as interest rates, employment, trade balance and GDP are of great importance. Other information such as retail, durable goods, home sales and ISM also influences the price movement.
-It helps to provide a specific entry and exit point for traders during trading.
-Charting can offer everyone an easy way to immediately identify trends. This is possible because millions of traders also monitor the same data. If a large number of Forex traders do the same, this may create a self-fulfilling forecast to further strengthen trends.
-It focuses on graphs and indicators. It is without a doubt the simplest and most precise method used by many traders so far.
– Graphs and tools can sometimes help to indicate when a trend will start or end. That's why traders help to plan their profits and stop losses more accurately.
– If many traders place their stops around the same areas, this can cause the price movement to be reversed because larger players in the market can intentionally activate it.
-The tools used are basically lagging indicators. It can be dangerous to fully rely on the assumption that the current price and trend will predict future prices. They do that often, but not necessarily.
– Full confidence in charts means that you may not receive any other signals that could change the trend.
– Fundamental analysis increases our knowledge and understanding of the world market. This helps us to get a better picture of the general health of the global economy.
-We can use fundamental analysis to explain some unexpected price movements. Hence knowing what the prices move higher or lower.
-Great news item can sometimes ignite large price movements when there is a big difference between expectations and actual results. If you can predict and record this price movement, it can be very profitable.
-Fundament analysis is better used for predicting exchange rate movements in the longer term.
-There is so much information that one can easily get confused.
-It is very difficult to use all this information to designate a specific entry or exit point.
– Sometimes a short-term news message may send a false signal and mislead the trader to open a transaction. This signal often develops a shock reaction in the market.
– Sometimes the released information or news is already priced on the market. Therefore, the information has no significant influence on the price movement.
-It requires a person with at least some basic knowledge of economic background.
– New releases can sometimes produce dramatic and rapid price movements for a currency pair in both up and down directions while the Forex market tries to process the news. Inexperienced traders can be caught in a series of losses.
In my opinion there is no ideal or best method to analyze the Forex that will always guarantee you 100% results. Technical analysis and charts help short-term traders make their decisions, while long-term traders need to stay up to date with the latest economic news and data about the currencies of the country in which they trade. Note that these analysis methods are only tools. If used correctly, it can generally help you to act more effectively. This is why most Forex traders use both analysis approaches to make trade decisions.