When it comes to developing a forex strategy, there are generally two schools of thought in terms of where you acquire your signals. These are technical and fundamental analysis, and are quite different in several ways. Many traders will only use one or the other, and many others will use a combination of the two. It’s always important to understand how the two work.
Some might say that you can almost split technical and fundamental into being quantitative and qualitative respectively. In reality, this isn’t really a wholly accurate representation, though it does show how roughly, technical analysis focuses more on numbers and chart patterns, where fundamental analysis focuses more on the underlying forces and reasons for price movement.
You’ll hear many people say that fundamental analysis is essential for forex trading, and to a certain degree this is true. Blindly following chart patterns is never a good idea, when a quick glance at the financial news will tell you if a currency is about to do something major. What isn’t necessarily essential is going into great detail about the reasons that the market is moving in the way it is. This is for people who really do use fundamental analysis as their main method of speculation.
Technical analysis is often regarded as a slightly easier way of finding indicators. This is primarily because it requires more learning and study than it does experience. Once you’ve learned the patterns to look for, and the best way to use your platform, you can begin to use what you’ve learned. With serious fundamental analysis, a considerable amount of trial and error is needed; as signals are often more open to your interpretation. For instance, you have to use previous knowledge and insight in order to fully understand how a country’s GDP announcement is going to affect the market. Technical analysis also requires less research, because your platform will supply you with all of the necessary tools to track prices. One source isn’t enough for fundamental analysis; your broker might give you financial news updates, but you need to look into detailed accounts when reports are released.
Because of the nature of the analysis, fundamental is more suited to long-term positions, where technical can be used for short-term and scalping. It’s almost impossible to take advantage of small fluctuations when not basing your information on patterns, and it’s very difficult to see very long-term trends when only studying the numbers.
It’s important to remember that what works in your strategy is what really matters, whether it’s once school of thought or a combination of the two. There’s no good reason not to combine both of the methods, but it’s good to understand how each one works, and where they are limited or useful. They are both effective when they complement each other, and a quick reference to one or the other before making a trade can tell you whether you’re making a mistake, or a really great decision.