What is the difference between technical analysis and fundamental analysis?
Anyone entering the forex market faces the challenge of choosing between technical and fundamental analysis.
Most analysts recommend combining the two, but in reality, traders prefer to choose one or the other.
The question isn't really about which is better or worse; it's simply about knowing the differences between the various analysis methods. This will help you make the right choice. Therefore,
we'll explore the key differences between technical and fundamental analysis and the specifics of their application.
But first, it's important to understand the specifics of each method.
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Technical analysis is the study of past exchange rate changes caused by various economic, political, or financial events. It analyzes historical data and identifies patterns in price behavior.
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We can say that the first analysis studies the causes, and the second the consequences, that is, first an event occurs, and then the price reacts to it.
Now that we know what both types of analysis are, we can highlight their main differences:
• Cause and effect – if fundamental analysis is the reasons that cause exchange rate movements, then technical analysis is the movement of these rates themselves displayed on the charts of currency pairs.
• Features of use - it so happened that the entire fundamental analysis has recently been reduced to tracking the news, that is, only the current situation is analyzed and in-depth research of the economy is not taken into account.
While technical analysis almost always involves historical data on the trend movement. Moreover, the analyzed period can last several years.
• Simplicity - for a beginner, trading on the news will be easier, while strategies that involve market analysis will already require some knowledge.
• Automation - almost all advisors for automatic trading use technical analysis in their work, transactions are opened subject to certain conditions 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 minimums (maximums) or reversing far from the boundaries of price channels.
• Short-term and long-term trading – it is safe to say that the data provided by the history of price movements will be more useful in long-term analysis, while on short time frames the price reacts more predictably to news.
To summarize the above, we can say that each type of analysis has its own advantages and disadvantages.
Fundamental trading is more suitable for inexperienced traders and for trading on short timeframes, while technical trading will help you make a long-term price forecast.
It should be noted, however, that this conclusion applies exclusively to Forex trading; other principles and laws apply in other markets.
