What is the difference between technical analysis and fundamental analysis?
Anyone who comes to Forex is faced with the fact that he needs to choose which of the technical or fundamental analyzes to use in his trading.
Most analysts advise combining these two types of analysis, but in reality traders prefer to choose one of the market research methods.
At the same time, the essence of the question is not even which option is better or worse, you just need to know how different methods of analysis differ from each other, only this will allow you to decide on the right choice.
Therefore, we will try to analyze the main differences between technical and fundamental analysis and the features of their application.
But first you should find out what each of these methods is.
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Technical analysis is the study of changes in the exchange rate that have already occurred, which were caused by various events in the economy, politics or finance. Analysis of historical data and search for patterns in price behavior.
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We can say that the first analysis studies the causes, and the second the effect, that is, first this or that event occurs, and then the price reacts to it.
Now knowing what both types of analysis are, we can highlight their main differences:
• Cause and effect – if fundamental analysis is the reasons that cause the movement of rates, then technical analysis is the very movement of these rates displayed on the charts of currency pairs.
• Features of use - it just so happens that all fundamental analysis has recently been reduced to tracking news, that is, only the current situation is analyzed and in-depth economic research is not taken into account.
While technical analysis almost always involves historical data on trend movement.
Moreover, the analyzed period can last several years. • Simplicity – for a beginner it will be easier to trade on news, while strategies involving market analysis will already require some knowledge.
• Automation - almost all advisors for automatic trading use technical analysis in their work; transactions are opened if certain conditions are met, when the price reaches a certain level.
• Efficiency – no matter what they say, fundamental analysis can still be called more effective, especially when it comes to really significant messages.
At the same time, the price does not always follow the rules established by technical analysis, easily creating new lows (highs) or turning far from the boundaries of price channels.
• Short-term and long-term trading – we can say with confidence that the data provided by the history of price movements will be more useful in long-term analysis, while at the same time on short time frames the price reacts more predictably to news.
Summarizing the above, we can say that each type of analysis has its own advantages and disadvantages.
Fundamental is more suitable for use by a trader without experience and for trading on short time periods; technical will help make a long-term price forecast.
However, it should be noted that this conclusion applies exclusively to Forex trading; other principles and laws apply in other markets.