The Difference between Technical and Fundamental Analysis
Market Analysis is one of the most continuous and deepest debates since time immemorial as far as the forex market is concerned. This debate has always revolved around how to determine the best market analysis method when it comes to forex dealings. Although there has been no actual conclusion that has been arrived at, having adequate knowledge on all forms of analysis has been widely advocated for.
Technical and fundamental analysis are two of the most common market evaluation methods particularly when forex trading is considered. Technical analysis is defined as investigation of both previous and ongoing price patterns in an attempt to accurately forecast future market trends. Fundamental analysis on the other hand is an assessment approach that derives the value of a country’s currency from analysing its economic health per time.
Since technical and fundamental analysis differ in more ways than one, it is crucial for traders to understand each of their major characteristics in their quest to determine their viability in forex dealings. This articles seeks to shed light on the deviation that exists between these two methodologies as well as the best points in time to utilise each of them when trading. So, let’s get started!
Areas of Contrast
The following are the major points of dissimilarity that exist between technical and fundamental analysis:
Technical Analysis and Price Patterns
Basis refers to the information considered by each technique when trying to forecast future currency position. Technical analysis focusses exclusively on price patterns when trying to predict future market behaviour. A price pattern is simply an identifiable arrangement in the behaviour of a certain currency price.
Price patterns show transitions between up and down price movements and are usually pinpointed by use of trend lines that link up the various price points. A reversal price pattern is defined as a change in the trend of an asset’s price while a continuation takes place when an asset’s price keeps going in the same direction following a brief stoppage.
Examples of continuation patterns are pennants, wedges and flags. Pennants just like wedges appear as two intersecting trend lines. The trend lines in pennants are usually bi-directional while those in wedges are normally unidirectional. Flags conventionally have two up, down or horizontal sloping parallel trend lines.
Head and Shoulders, Double Bottoms and tops as well as gaps are some of the most common reversal patterns. Double bottoms and tops respectively signify two unsuccessful attempts by the market to go beyond support and resistance levels. Gaps tend to take place when prices rise or fall significantly thereby causing an empty space between two trading timespans.
Fundamental Analysis and Data Points
In fundamental analysis, data points are used as the basis of finding out the value of a given currency. Data points are simply the periodic releases of relevant information that affect the general health of a country’s currency. It is these data points that influence the traders on whether they should deal in a particular currency or not.
The major macroeconomic data points that affect currency behaviour include the Gross Domestic Product(GDP), Interest Rate, Inflation and the Balance of Trade Deficit. When a country’s imports outweigh its exports, its currency is more likely to depreciate in value. This is because they are trading in more foreign than local currency. Inflation which is majorly caused by too much money in circulation is also likely to decrease the worth of a nation’s currency.
Technical analysis is very flexible for traders as far as short, medium and long-term prediction are concerned. This is because it utilises indicators which are adjustable when it comes to forecasting periods. This means that a trader can be able to use these indicators to get signals useful in short-term transactions while still evaluating trends that are vital in medium and long-term dealings.
Fundamental analysis is however not as adjustable as technical analysis particular where short-term trading is concerned. This is because its forecasting is based on macroeconomic elements which usually take time to have significant effect on the market.
Both technical and fundamental analysis are useful tools when it comes to determining future forex market behaviours. As such, it is important for traders to have insight in them so as to enjoy greater success in their forex dealings.