Forex Basics: Fundamental vs. Technical Analysis in Currency Trading
If you like browsing forums and sites, you might have heard several times of the terms fundamental analysis and technical analysis, two methodologies of analyzing the market in order to decide when to enter or exit a trade. But what are they all about?
Fundamental Analysis: Trading the News
The practice of using fundamental analysis is also often referred to as trading the news. In fact, this methodology consists in using the market news in the various scheduled press releases around the world and profiting from them. In the world of Forex, economic releases tend to have an effect even before they actually occur, so traders usually speculate on whether the predicted impact of a certain trade will mirror its actual consequences once it has been released.
For this reason, people who trade according to the principles of fundamental analysis often follow the philosophy of "buying the rumor and selling the fact," a phrase that you might have already heard several times.
Technical Analysis: Oscillators and Indicators
Like the words "technical" suggests, this kind of analysis relies on mathematically and statistically derived indexes to help you decide when to open and close your trades.
Some of the most common indexes include moving averages, RSI, Bollinger bands, parabolic SAR, and many, many others. They are usually grouped into two categories, "oscillators" and "indicators": while the former try to predict a trend change before it even happens, the latter are used as a confirmation of the strength of a trend that is already in progress.
Since there is a very large array of indexes to choose from, most of the trader's work lays in understanding the meaning of the main ones and deciding how to combine two or more of those together in order to have a better confirmation of the future behavior of the market.
For instance, one common way to combine two indexes is the so-called moving average crossover, in which we plot both a simple and an exponential moving average, and we choose to buy and sell when the two lines cross.
Putting It All Together
Despite what you may have heard before, no trader can afford to dedicate his efforts to either technical or fundamental analysis exclusively, completely disregarding the other one — both play a great role and truly help traders to choose the right moment when to open and close a trade, so you will need to learn how to combine the two effectively if you are serious about trading currencies profitably!