Fundamental & Technical Analysis in Forex

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When it comes to how traders approach the markets, fundamental and technical analysis are two of the biggest chapters in the forex industry. Most of the times, investors use both to research and predict future stock prices and like any other trading strategy, they both have advantages and disadvantages.

In general, technical analysis studies currency price movement on the charts while fundamental analysis examines the status of a country’s economy. IronFX covers many aspects of fundamental and technical analysis in its blog.

What is Fundamental Analysis?

Fundamental analysis refers to the evaluation of stocks through measuring their inherent value. A fundamental forex trader uses fundamental analysis to dig deeper into the overall economic status of a country and its inflation, into the conditions that affect the industry such as trade balance, Gross Domestic Product (GDP), growth in jobs or even into the central bank's benchmark interest rate. They also study the financial power and management of individual entities. Aspects covered by fundamental analysis also include profits, expenses, instruments, and other liabilities. 

By assessing all of the above, a trader is actually determining whether to trade the future movement of that country’s currency. Fundamental analysts will not consider currency price movements but will rather use data to determine the strength of a specific currency. 

What is Technical Analysis?

Unlike fundamental analysts, technical analysts search for opportunities by looking at price recognition and statistics including stock price movements and volume. In fact, technical analysis studies patterns such as triangles, flags, and double bottoms. The entry and exit points will be determined by the trader, based on the pattern. Many of these patterns used to analyse the forex market can also be applied to other markets.

Technical analysis traders do not go deeper into a security's intrinsic value but rather use stock charts to identify patterns and trends that predict future stock behaviour. In other words, they examine the price action, trend, support and resistance levels spotted on a chart. Moreover, they are not as concerned with the reason behind a price movement as they have signals which are the trends and patterns on the charts.

Additionally, traders using technical analysis use indicators because they are easy to use and provide clear signals.

Differences in a nutshell

Technical Analysis:

• Predicts price movement based on chart patterns
• Collects data from price action on the charts
• Requires chart analysis experience

Fundamental Analysis:

• Studies economic data to establish target price
• Collects data from inflation, GDP, interest rates and more
• Requires economics and statistical analysis experience

Trading with Fundamental & Technical Analysis

Among forex traders, there is a great debate about which type of market analysis is more effective in trading. IronFX’s trading school offers some insights on developing your trading strategy along with advanced content for both beginners and professionals. 

Fundamental and technical analysis are two equally efficient strategies depending on each trader’s scope. Their approaches to trading differ. There are some traders who prefer to use these two types of analysis separately depending on their trading style and purpose. However, there are others who use a combination of the two since combining fundamental and technical analysis contains multiple advantages.