Forex Strategies - Technical vs. Fundamental Analysis
Technical vs. Fundamental Analysis: Which one is the better? Traders have been trying to find the correct answer to this question for a hundred years. There are approaches that involve the use of either analytical style to the complete exclusion of the other, and there are other methods that utilize both fundamental and technical tools for the derivation of forex strategies. In this article, we’ll take a look at this subject briefly.
Technical analysis is the study of price action, pure and simple. For the technical analyst, the alpha and omega of trading is price, and everything else is just detail, often superfluous and useless. The theoretical basis for this approach is the belief that prices discount all information available to market participants. The market is comprised of smart, experienced and skillful individuals who are on top of their brief with respect to market events, and their consensus is the most precious piece of information available to traders, and the only data that reflects market’s consensus is the price quote itself.
Fundamental analysis, on the other hand, is only partially concerned with the price. Although fundamental analysts take the price into consideration when evaluating market action, and deriving signals, they deemphasize the importance of price data as the consequence of irrational and emotional processes in the short term. Fundamental analysts seeks to establish the causes that determine the long term direction of the price action, and look far and wide while seeking those. Politics, social events, economic factors, and technological innovation, and many other factors are included in their calculations, in strong contrast to technical analysis where the only needle on the compass is the price.
It is important to note that the conclusions of fundamental and technical analysis converge on each other in the long term. Although fundamental analysis says nothing about the short term, the dynamics described by it are the causes of the trend-line identified by technical analysts on long term charts. Similarly, although price may not be a valuable indicator of economic activity in the immediate term, trend lines and the price action clearly reflect, and indeed must reflect the fundamentals of any economy that is examined. The opposite would be absurd, and would make trading and economic activity meaningless.
So which school should you choose for your career? That will depend on the frequency of your trading, the depth of your knowledge, and the level of your self-confidence. If you trade infrequently, understand the markets, and are confident in your skills, fundamental analysis is your choice. If your main aim is short term speculative gains, technical analysis would be your perpetual companion. In both cases, online forex trading requires discipline and patience, and no style or school of analysis will negate the need for emotional control and humility in trading. It is safe to say that neither of these methods will generate stellar returns on a consistent basis in the absence of careful risk controls and diligent money management. The risks inherent in trading in general are not negated by adherence to philosophy, but rather by constant and patient practice of money management methods.
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