Fundamental and technical analysis on Forex

By On

In the forex market, in fact, as in any other international market, two main types of analysis are used. This is technical and fundamental (it is also called news). In this article, we will talk about these two types of analysis and try to decide: is it worth using one analysis when trading forex or both at once?

Technical analysis

Technical analysis is a variety of methods based on calculations. That is, you use a variety of indicators that process price movement data.

At the same time, each indicator has its own principles and calculation methods. But they all use the same thing – price quotes. After applying the indicator, you do not get an unambiguous answer to the question in which direction the price will go. The result will also be data that must be able to apply. Often this data is a type of chart or several multi-colored lines on top of the quotes chart, by the relative position of which one judges the possible price movement.

You don’t have to calculate anything. Special programs have already been created for this. For example, ForexClub has Rumus or the well-known MetaTrader for most other companies. These programs contain most of the known indicators (about forty). It is pointless to learn and apply them all, as it may turn out that one indicator will contradict another, and the monitor screen will be full of charts, lines and other nonsense, which will be very difficult to understand. Yes, and it is impossible to perfectly study them all. It is better to become a professional in one thing than to take on everything.

In addition, the information received will not be a call to action, but rather a support for the direction of your further actions, because it does not give a 100% result. This is more true for short-term intraday trading. For long periods of time, in principle, they will all fit. But this does not mean increased performance when using indicators in long-term trading. Problems and losses were, are and will always be.

Also, technical analysis uses a variety of methods on a graphical basis. For example, the most famous is the theory of Elliott Waves and the Fibonacci Numbers accompanying this theory. They are based on the principles of price chart movement. That is, the intervals of rise and fall of the price, how many there were, the sequence, etc. The same expression applies to these methods, as a rule, but no more. And in the end, you, too, “usually” will be able to predict the price movement.

It is worth noting one important thing – no type of analysis gives one hundred percent certainty in the result.

Whichever method you use, it will only provide information. All people interpret information differently. Everyone uses the same indicators, the same methods and principles, they rely on the same fundamental data, but for some reason the result is different for everyone. Some, it turns out, see the future in the market, while others do not. Although it seems that everyone is equal in methods and information. However, no, there is no definite equality. Yes, everyone uses indicators, news, data that are available to everyone. Why then do some win and others don’t?

In essence, Forex forecasting is the same as weather forecasting. Does what meteorologists tell us always come true?! Often not. Although scientists work there, people seem to be intelligent and intelligent. Yes, and they work on supercomputers, which are thousands of times more powerful than ours. Why do misses happen? Let’s use an example with technical analysis:

The fact is that technical analysis is based on the laws and principles of mathematics and probability theory (I mean, without dividing into sections). And mathematics is an exact science.

You cannot insert the element of surprise into it, which is always present in the market. From this point of view, it is easier to develop a methodology for a casino than for Forex, since the number of all parameters and their values are known. Is it possible to say the same about forex? Unlikely.

For technical analysis, only one parameter is needed – these are quotes. One sign is not enough. It is also necessary to take into account the psychology of behavior in the market, unexpected information (terrorist attacks, natural disasters, economic data, loud statements by politicians, etc.). But you can’t tie all this to numbers. Yes, if everything was so simple: loaded the data, pressed the button and that’s it. No, it doesn’t, and it probably won’t. The result of any technical analysis is again a set of data, which also needs to be interpreted correctly.

Therefore, whether or not to use technical analysis in your trading is up to each individual. Each of you will decide this for yourself, depending on which trading system you choose and what it will be based on. It will also play a role, and what kind of trading you prefer – short-term or long-term.

Fundamental analysis

Analysis of the forex market is not limited to technical analysis, there is another type – fundamental. The meaning of this analysis is to assess the possible impact of various kinds of events on the movement of exchange rates. In a word, fundamental analysis analyzes the economic and political state of countries whose currencies are present on the forex market.

We can say that if the news or data is favorable and with all its appearance shows that everything is going well in the country, then, as a rule, the rate of the national currency rises. While vice versa – falls.

If you use fundamental analysis in your trading, then you must know the most important outgoing news that will greatly affect the movement of the currency. Namely:

change in the interest rate on loans of the Central Bank
various news related to transactions with securities
US unemployment data, etc.

The strongest movements, of course, are caused by changes in interest rates. Their increase will be characterized by large upward movements, due to the appreciation of the currency, and their decrease will be characterized by a depreciation of the exchange rate and a huge move down. Also, the rate can be left unchanged, which will practically not affect the market in any way.

All information on upcoming news and events can be found through various news agencies. Like Bloombery, Dow Jones, Reuters. Today you do not need to look for this information yourself. As a client of any dealing center or brokerage company, you will automatically be supplied with all the necessary information. So you, as a speculator, will always be aware of all events. Moreover, all the necessary news will be indicated with the date and time when they come out.

However, it is worth remembering 2 nuances:

Next to the news, there are forecasts of major analysts about the expected expectation of the news. So, such forecasts cannot be used as 100% correct. Very often the news comes out with discrepancies in forecasts. Therefore, all those figures that are near the news in the forecast column should simply be taken into account, but not a signal for action.
Sometimes events can occur in a country that cannot be predicted in advance by military operations, natural disasters or terrorist attacks. This is also directly related to fundamental analysis. And such events have a strong impact on the currencies of any country where it happened. Neither the degree of influence nor the timing of such events can be known. Thus, thanks to them, you can get into a loss or make money if you accidentally guessed on the side of entering the market. However, practice suggests that a bad outcome is more possible due to the uncertainty of the situation. So once again, when trading in the foreign exchange market, always put a stop loss in order to be ready for such events.

As you can see, there is nothing particularly complicated in fundamental analysis. In trading, someone is guided by this type of analysis, someone is technical. Personally, we recommend combining them, but still focus on fundamental analysis. Since it is under the influence of the economy that exchange rates move.