I
f you ask a thousand traders their opinion of this question, you will get 1000 different answers.
You need to know all three of them, after then you can decide which one fits your trading strategy better.
Technical Analysis vs. Fundamental Analysis
Forex market is like earthquakes – each is very different and you never know for sure where it will go or why or how far it can go. You can try and predict, then sit back and wait.
That’s why you need all these different types of market analysis, in order to tilt the odds in your favour.
You need to understand there is a very tight connection between those two, which you shouldn’t try to break if you don’t want to trigger an earthquake.
Let us explain to you, the prices are changing all the time, which lead to creating trends.
Technical analysis fully observes those trends and gives you information based on them. Those changes of the price affect fundamentals.
On the other hand, fundamentals are those who determine how the price will be changing.
Fundamental and technical analysis include many different trading strategies and approaches; offering unique value and insights to support trading decisions and when to enter or exit trading.
The benefits of combining fundamental and technical analysis are HUGE.
REMINDER: The technical analysis assess price action, trend, support levels and chart resistance,while the fundamental analysis involves assessing a country’s economic well-being and subsequently its currency.
Market sentiment analysis defines if you have a bullish or bearish market on the current or future fundamental outlook.
You got to understand it is A THREE LEGGED CHAIR!
Fundamental factors give insights to the sentiment analysis, while technical analysis show us how the sentiment looks like and apply a framework to create our trade plans.
Let’s play out a possible situation on the market and see your reaction if you have focused on only one type of analysis.
While looking at your charts, you found a good trading opportunity.
You got all bumped up and go long GBP/USD.
You even called your girlfriend and told her to prepare her baggage, because tomorrow you two are leaving for Maldives on a private jet charter.
You made a few more phone calls, while waiting to become rich.
But suddenly the trade makes a 100 pip move in the OTHER DIRECTION!
You still don’t know what is going on. The chart was speaking very clearly.
Your grandma enters the room and turns on the TV.
You hear something very strange that the UK just decided to break up with the EU.
At this moment it’s more like the UK is breaking your heart.
Yes, UK economy is ruined, but your account balance is ZERO as well!
In the light of such news, everyone got a cold feet and their sentiment towards Britain’s market turned sour, that’s why the trades began to go in the opposite direction!
You wish that this is one of those stories that in the end the storytellers say: “Guyssss, I got you, it is a joke, it is not real!”. In fact, the story is not real but pretty similar things can happen to you if you completely ignore fundamental analysis and sentiment analysis.
Instead, you must learn to balance the use of all of them. It is only then that you can really get the most out of your trading.
In the following lessons, first, you will get to know more and experiment with fancy technical analysis tools – the Japanese candlesticks, support and resistance levels etc.
When you pass with flying colors your exam of technical analysis, you will continue with both fundamental AND sentiment analysis at the same time.
Kidding, kidding! You don’t have an exam with us! But better be careful in the next section, if you want to see the chart for what they are, instead of seeing them as Chinese symbols.
P.S China, sorry for the reference, but you know your alphabet is the most alien thing we all have seen!
