There was a debate in the Forex community about which type of analysis is more usable, technical or fundamental. That debate is still going on in some places.
However, this discussion is mostly for newer traders who fail to realize one simple thing when they are learning to trade Forex: these two types of analysis are two slightly different aspects of the same thing – financial analysis. Note that we used the word “slightly”.
Some people think that this style of analysis is the opposite of the technical analysis. One of the core differences in these two styles is that enthusiasts of fundamental analysis rely on the strong established brands, companies, economies to base their judgement on something that people will go long on.
During the economy recession, investors tend to go short on various weaker stocks trying to cut the potential losses.
This is the main destination point for the fundamental analysis that tries to estimate how the market will react to the specific events and changes related to economic indicators on the macroeconomic level.
Even the slightest change in the local regulations, industry standards, and new groundbreaking products can significantly change the situation in the market forcing investors to reshuffle their portfolios and moving prices in certain directions.
It does not mean that this intrinsic type of analysis does not rely on numbers and tries to make predictions based on the news and gossips only.
There are hundreds of tools that can be used to make estimations and evaluate possible changes in the market. Describing all of them is simply impossible.
Let’s take an example: an investor wants to decide whether to buy specific stocks (in Forex trading, we usually work with the CFD contracts).
There are several important factors that this investor should consider.
Here they are:
This is obviously not the fullest list of the factors that should be taken into consideration. There are additional methods that can help you to design a better analytical pattern.
The problem with trueness of the results is one of the core issues in any kind of analytical processes. In fundamental analysis, the amount of variables that have to be incorporated in the estimation is too big. Let’s keep on working with an imaginary stock.
We just decided that we need some quantitative measurements to make a guess of where the market will go and how strong the movement will be.
There are more factors that must be included in the analysis if we want to make closer estimations. Here are some more variables:
Again, this is not the fullest list of variables that affect any asset. The problem is that the result becomes diluted because of many constantly changing parameters that do not give you a good understanding of what is currently going on.
The comparative analysis becomes too complicated and makes you put in the titanic efforts to make a good assessment of the current situation. How does this method differ from the technical one?
The main assumption of the technical analysis is that all information is already included in the price meaning that you don’t really need anything else but the price and its history to make accurate predictions.
This is a false statement since lots of people use the complementary data (volumes, cross comparison, and many others) to analyze the price.
Technical analysis is a much different method compared to what it was many decades ago. We have a lot of interesting instruments that proved to be working in the long run.
These instruments are called indicators (you may know them as Forex tools) and can be applied to any price graph.
Here is an incomplete list of indicators:
Check the list of the indicators used in Forex Tester software (45 right at the moment) here.
Please, note: in our blog there are numerous articles about indicators including their settings, strategies and trading set ups. Read the detailed article about Awesome Oscillator, for example, or the Alligator Indicator, as well as many others.
Enthusiasts of TA usually base their assumptions on the price history and try to identify various market iterations. In fact, a whole separate domain of Technical Analysis is dedicated to analyzing the history of the graph and searching for the apparent iterations.
The graph is a mathematical representation of the price changes over some time meaning that it will inevitably have some forms of iterations on a long enough time line. The price will change due to various economic factors that have the cyclical nature.
Even if you look at the macroeconomic graph (let’s say GDP over time), you will notice some repetitions. The parameter will go up and down depending on various factors.
Of course, the trend will go upwards mostly due to the technological progress and population growth. This type of the Forex analysis is very popular.
This is why we often use GDP per capita adjusted for inflation to have a better understanding of the history and possible changes that could be inflicted by a certain political or social change.
You can notice that some patterns appear more often than others. Technicians have their own explanation for each pattern. For example, Double Peak usually tells us that a trend reversion has happened.
Investors tried to support a certain trend, but it was not possible. After a short correction, the price started moving in the opposite direction.
The Double Peak pattern often suggests that a new long-lasting trend is forming in the market.
You should always start from a broader general analysis. Usually simple moving averages are used to determine the trend. Then, RSI is used to determine the strength of a trend. After that, people use other momentum indicators to assess the situation.
All traders have their unique settings and indicator sets that help them to understand the market better.
The real purpose of the indicators is to give you a good visual representation of the market and its trends. Visualization is incredibly important for the successful Forex trading.
Here how you can use various techniques in an order:
Fundamental and technical analysis can be the complementary aspects of a complex analysis system. You don’t necessarily have to put them on the opposite sides of the spectrum. Instead, try to give each technique a purpose.
You can use them this way:
The last option is very useful to set take profit/stop loss levels or to choose the length of a certain deal. Technical analysis is based on many loose assumptions, but they can help you to complement your analysis of a certain scenario that is about to happen.
For example, you are expecting that a new product is going to be announced during an EXPO. You know that new products usually boost certain stocks.
You can use technical analysis to check whether the trend is opportune and to estimate how much the market can move.
As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.
To check this (or any other) analysis performance you can download Forex Tester for free.
In addition, you will receive 20 years of free historical data (easily downloadable straight from the software).