Pros and cons of using technical and fundamental analysis on Forex

There are basically 2 main methods that Forex traders use to analyze the market. They are a technical and fundamental analysis. Pure technical analysts will say that trading on the news is impossible because the market is moving so fast, and any news on the charts will tell you too. On the other hand, fundamentalists will say that only news moves the market. Technical indicators are always followers. So what methods should we use? To learn about this, let’s look at the pros and cons of both of these methods.

Technical analysis

Technical analysis involves tracking past currency price movements and using indicators to help determine which direction the current price may be moving. This analysis can be performed manually or automatically. As part of an automated system, traders use software (expert advisor) or a robot to help them find trades and determine entry and exit points. Technical traders believe that all the necessary information needed to close a deal is contained in the charts.

Fundamental analysis

Fundamental analysis focuses on key economic, financial and political factors to determine the price direction of a currency. Fundamental traders believed that the movement of currencies, whether it increases or decreases, is due to the strength of the economy, financial and political situation. Therefore, fundamental reports and news are important to them. News and reports such as interest rates, employment, trade balance and GDP are very important. Other information, such as retail sales, durable goods, home sales and ISM, will also affect price movements.

Technical analysis

Benefits

-It helps to provide a certain entry and exit point for traders during trading.

-Mapping can provide everyone with an easy way to instantly identify trends. This is possible because the same data is also observed by millions of traders, as a result, if a large number of Forex traders do the same, it could potentially create a self-fulfilling prophecy of further strengthening of trends.

-Focused on charts and indicators. This is undoubtedly the simplest and most accurate method used by many traders so far.

-Maps and tools can sometimes help find out when a trend is about to start or end. So help traders plan profits more accurately and stop losses.

Disadvantages

-If many traders make stops around the same areas, it can cause price reversal as it can potentially allow major market players to intentionally cause these stops.

-The tools used mostly lag behind the figures. It can be dangerous to fully rely on the assumption that the current price and trend will predict future prices. They often do, but not necessarily.

– Fully relying on charts means you can’t pick up other signals that could potentially change the trend.

Fundamental analysis

Benefits

-Fundamental analysis increases our knowledge and understanding of the global market. So, help us get a clearer picture of the general state of the world economy.

-We can use fundamental analysis to explain unexpected price movements. So know what drives prices higher or lower.

-A great news release can at one time roll up a significant price movement when there is a big difference between expectations and real results. If you can predict and record this price movement, it can be very profitable.

-Basic analysis is best used to predict long-term exchange rate movements.

Disadvantages

-There is so much information that it is easy to confuse.

-It is very difficult to use all this information to determine a specific point of entry or exit for a trade.

-Sometimes short-term news releases can give a false signal and mislead the trader when opening a trade. This signal often develops a reaction in the market.

-Sometimes information or news that has been published may have already been made available to the market. Thus, the information does not have a significant impact on price movements.

-Requires a person who has at least some basic knowledge in the economic sphere.

-Non-issues can sometimes cause a sharp and rapid movement of currency pair prices both up and down as the Forex market tries to digest the news. Inexperienced traders can find themselves in a number of losses.

Conclusion

In my opinion, there is no perfect or best method of Forex analysis that would guarantee you 100% results all the time. Technical analysis and charts will help short-term traders make decisions, while long-term traders will need to be aware of the latest economic news and data concerning the currencies of the country in which they trade. Note that these analysis methods are just tools. Used properly, it can help you trade more efficiently. This is why most Forex traders typically use both approaches to analysis to make trading decisions.

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