A Comparison of Fundamental and Technical Analysis

Success in the foreign exchange market is not wholly dependent upon an investor’s luck in choosing his trades. Most investors actually use specific analyses to help in their decision-making. They collect economic data from nations of interest and then use a certain method of analyzing on which to base their decisions. Anyone interested in forex trading can use these methods too. Read on to better understand the differences between fundamental analysis and technical analysis.

Fundamental Analysis

Investors who prefer fundamental analysis believe that the overall picture of a nation’s economy is a mirror of the foreign exchange market as it relates to that particular country’s currency. To put it simply, if a country’s economy is doing poorly its currency will be valued low. If the nation’s economy is booming, its currency will be strong as well.

With fundamental analysis, investors set most of their attention on the overall picture of an economy. They must stay up-to-date on the politics and current events of a nation to help predict the future value of that nation’s currency. It is very helpful for an investor using this approach to be at least somewhat knowledgeable in the field of economics.

Technical Analysis

Technical analysis can be considered the opposite of fundamental analysis. Using this method, an investor looks at the past trends of a currency instead of looking at the nation’s economic situation. Traders on the foreign exchange market who prefer this approach compile data sheets on the recent history of a currency’s increases and decreases in value. They then use this data to make predictions about the currency’s future.

Anyone who desires to use technical analysis must be ready to read and memorize lots of data and information. This method involves many reports about a currency’s past fluctuations. In addition to historic trends, an investor must understand various trading concepts, such as the Elliott Wave Theory, in order to make successful predictions.

How to Decide

Deciding whether technical or fundamental analysis is preferable remains an issue of debate. A nearly unending stream of traders will argue in favor of either side, and each side is convinced that its preferred method is more effective, more efficient, and more successful. Unfortunately, forex trading is not that simple.

The use of either of these methods of analysis will work. However, an investor who uses both methods will likely achieve the greatest outcome. Each method looks at a currency differently – one in a broad fashion and one in a detailed fashion. A successful trader is one who can utilize both sets of data to make the best trading decisions.