Is Fundamental Analysis superior than Technical Analysis (or Vice Versa)? I've been trying to avoid writing a blog about this because I'm definitely going to get some very opinion minded traders writing back saying "You are Wrong! XYZ Analysis is way better!"
The emotional response from this question is similar to asking, "Are apples better than bananas?"
Still, I'm going to give a go here. Hear me out.
Now, both techniques are used to assess the probability of future market trends, but they take different approaches. So, which one is better? Let's take a closer look.
Fundamental Analysis is basically analysing macroeconomic events to predict what will happen to the markets. Most markets, if not all, will be impacted by big news events to some degree, regardless of whether you are trading forex, stocks or cryptos. Obviously news events that are more tied to a certain market will make a much bigger impact.
Here are some examples of impactful news events:
These types of news events are very sensitive to the Forex Market.
Let's take one of these news events and see how they impact the market, say the GDP.
Notice that there are figures being released in these news events. And here, you will be able to see that the Actual Figure is much worse than the previous figure.
Something like this will cause a significant move in the market. Have a look at EURUSD when GDP figures were released:
In some cases, these news events will set the sentiment for a certain market for a very long time, anywhere between 6 months to a year even!
When Covid was introduced to humanity, that's a historical moment. And look at what happened to safe havens like JPY when Covid started affecting the world.
Generally, fundamental analysis is a longer term approach that requires a lot of research and analysis. Traders who use this approach often hold their positions for weeks or months, waiting for the market to respond to economic or even political events.
Here, traders are just drawing lines on charts. That's about it. LOL
I suppose that's what it looks like on the outside.
But in all seriousness, Technical Analysis has a lot to do with the actual chart of the market. It all comes down to understanding how price action works, analysing charts as well as using indicators to identify price trends and patterns.
To put it simply, charts are like alien languages.
The trader's job is to decipher what it means, so that they know what's likely to happen next. And there is just so many ways for 'deciphering' the chart. One of the most commonly known technical analysis approach is the Support & Resistance concept:
Here's an extremely basic way of using them:
Support & Resistance trading is basically looking out for an area where price tends to react from, and the trader's job is to anticipate a further reaction from that area. Giving them a trade from that Support & Resistance area.
Again, this is just a very basic example. We actually have a blog post about how to use Support & Resistance. Check it out here: Click Here
As opposed to Fundamental Analysis, Technical analysis is more of a short-term approach that requires traders to be more active in the market. Traders who use this approach often hold their positions for hours or days, taking advantage of short-term price movements.
Instead of using fruit as an example, let me actually ask this instead:
You live in a city where crime rates are really high. Which self defence method is going to be more effective for you? Kung Fu or Thai Boxing?
There's just no way to know for sure which is 'better', but one thing is for sure, you will be more equipped to protect yourself knowing any of those 2 martial arts techniques.
The same thing would go for Fundamental Analysis and Technical Analysis. You'll find great traders making great sum of money in both categories. It all comes down to which technique you are more comfortable with.
Let me give you a quick break down of each analysis' pros and cons:
Now, I don't want you to leave this blog feeling more confused than when you first landed on it.
Often times, traders like to use a combination of both types of analysis. Knowing that news events from their fundamental analysis are going to be a big catalyst to move the market, traders will try to 'time' them with their indicators from their technical analysis. This is essentially combining the best of both worlds.
We, from Urban Forex actually approach the market like this as well. Check out out approach here.
Just know that, whichever technique of analysis you use (even combining them for that matter), so long as you master them, you will achieve the bottom line goal, Making Money in the markets.
So waste no more time, and go out there mastering your technique!
With Pip Love,
Lucas from Urban Forex
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