It’s widely believed that there are two schools of thought when it comes to analysing the financial markets, whether you’re trading forex or stocks.
These are fundamental and technical analysis. Fundamental deals with the underlying reasons behind market movements; looking at historical trends, announcements and developments. Technical analysis on the other hand looks almost purely at charts, looking at patterns to spot trends emerging that can be capitalised on. Some traders will use one almost exclusively, others will use a combination of both. The question is, can you actually be successful without having one eye on the fundamentals?
The Case for Fundamental
Many will argue that it’s crazy not to take note of market announcements, and general developments and statements in the world of finance. If you analyse a company, then surely that’s going to give you the best view of how successful it’s going to be. If you’re thinking about purchasing a large quantity of foreign currency, then you need to be well up-to-date on how that country is doing, what the central bank is planning, and indeed the same for the currency you’re changing from. That’s the idea anyway. Fundamental analysis is all about getting the bigger picture and a complete understanding of what’s going on. It’s only natural to assume that many people will insist that you can only be truly successful with this kind of comprehensive analysis.
The Case against Fundamental
On the flip side, some will argue that the markets (forex in particular) are ‘perfect’, which is to say that they’re so large that all developments, announcements and information are already priced in. You can think that you’ve spotted something happening down the line, but so has everyone else, and the market price and trend has already acted accordingly. This means that some technical analysts believe that chart patterns hold absolutely all of the information that they need to decide when a position has presented itself.
In truth, it’s very difficult to say who is right or wrong, mainly because the most successful traders generally keep their cards close to their chests. Most good brokers, such as ETX Capital, will provide regular updates relating to both schools of analysis – so you know that both are in some way of equal value. What we do know however, is that forex trading is all about finding what works for you, and sticking to your guns.
Main image by Ged Carroll @ Flickr