In this issue of the Celestial Trading Tools Educational Blog we are going to review the pros and cons of Technical and Fundamental Analysis to see which is better and why.
In the previous issue we discussed who trades the forex market, if you haven’t already read that post we suggest you take a look before reading this to give yourself a good understanding of who trades the market as these participants will trade in very different ways.
What is Technical and Fundamental Analysis?
Before we get into the nitty gritty, it is worth understanding what Technical analysis is and what Fundamental analysis is.
Fundamental Analysis is using economic data such as CPI, Interest Rates, GDP etc to deduce a currencies strength/weakness and then comparing to other currencies and their respective data before making a trading decision. This is what has been used for decades before any complex chart software was invented and is typically used to hold trades for months, financial quarters and years.
Technical analysis bridges the gap between fundamental analysis and everyday movement. Data alone does not dictate where specific currency pairs will move, and so technical analysis bridges this gap. This form of analysis is based upon trading being dictated via human behaviour and thus patterns will repeat themselves. This form of analysis is what most of you will have seen and heard of with terms such as ‘support’ ‘resistance’ ‘trendlines’ ‘Fibonacci’ etc being used frequently. Typically, this form of analysis is used to predict smaller price moves and trades based on this form of analysis are only held for a matter of hours, days or possibly weeks.
Who uses Technical and Fundamental Analysis?
Now we have an idea of what Technical and Fundamental analysis is we can take a look at who is likely to use which method.
Big banks and Central banks are likely to base most of their trades from Fundamental data releases as this has a large impact on the long-term strength and weakness of a currency. The big boys aren’t interested in entering and exiting trades in a day. They are holding larger positions over a longer period of time, so fundamental analysis is vital for them.
Typically, retail traders and hedge fund managers are more likely to use Technical analysis as they are not holding such large positions and are more likely to trade from the shorter timeframes holding trades for a few days if that.
Which Analysis Method Should You Use?
To suggest that you should only use one analysis would be irresponsible and very poor advice. As retail traders we need to make the most of all the information we have available to us and so using economic data is definitely important. However, we must recognise we are receiving this information through a 3rd party website and so are getting this information after the big banks have. So, whilst we cannot trade this information directly, we can use it to give us an idea of a specific currencies strength within the market.
We can then use our technical analysis tools to create high probability trade setups to then execute ourselves and hold for however long is necessary. It is worth noting however that the majority of retail traders are also using these same technical tools and are losing money. So, we must know how to use them properly and effectively in order to be successful otherwise we will fall into the pile of statistics that say 90% of retail traders lose 90% of their balance within 90 days of trading.
To conclude neither Technical nor Fundamental is best alone. However, using both these analysis methods together in a well-defined rules-based system will provide us as traders with the best results possible.
Thank you for reading this issue of the Celestial Educational Blog. We hope to see you again soon!