Fundamental Analysis vs Technical Analysis

Forex traders use different types of analysis to determine which stocks to pick. There are two main analytical models when the objective is to decide which stocks to buy and for how much.

Firstly there is fundamental analysis, which looks at various factors to predict current market trends. Fundamental analysts will look at factors such as a country’s governmental policies, bank policies, consumer’s moods and unusual situations such as a natural disaster to determine how many certain stocks are worth. This approach follows economic trends and converts the results into accurate indicators of entry/exit prices.  Buy and hold investors often use this analysis as it allows them to invest in so-called ‘good’ companies which will allow an investment to grow, as the business expands. Value investors focus on under-valued companies, as there is not much room for loss, only potential profit. These principles come from fundamental analysis.

The second method used by Forex traders is technical analysis, which is at the opposite end of the spectrum to fundamental analysis. This approach disregards any current trends and instead relies on defining market movements from the data generated purely from the markets only, namely past price and volume. Technical analysis ignores the nature of the company, market, currency or commodity and bases its analysis purely on intra-market price correlations, cycles or chart patterns. This method identifies any price reversals or pivotal points and finds changes in market trends, which indicate when to enter or exit the market.

Many traders specialise in one approach, however, the most profitable companies will have both fundamental and technical analysts as neither are completely foolproof or 100 per cent accurate. Currency can be affected by variables such as war, famine, natural disaster or a change in leadership but also by knowing technical methods you can study the effects of price and time to consider values. The approaches work best in union and research has shown that maximum profit can be made by using both methods of analysis.

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