Technical vs. Fundamental Analysis
Technical Analysis is the study of price charts, patterns, and indicators to determine potential trade opportunities and forecast future price action. There is only regard for the observation of price action, with no consideration of the external factors affecting currency values. Some technical analysis tools include:
Trendlines: Lines drawn on charts indicating the direction in which the current price action is heading, in a bull (upward) or bear (downward)direction.
Support and Resistance Levels: Level price points at which the market finds buying (support) or selling (resistance) interest.
Chart Patterns: Recurring shapes on price charts that might indicate trend continuations or reversals, such as head and shoulders, triangles, or double tops/bottoms.
Indicators: Equations based on price and volume data, such as Moving Averages, Relative Strength Index (RSI), or Bollinger Bands, which are beneficial in indicating trends and potential entry/exit opportunities.
For example, a technical trader might see a bullish ascending triangle pattern in the AUD/USD chart that indicates a possible upside breakout. They can then order to buy just above the pattern's resistance level, with a stop-loss below the pattern's support level.
On the other hand, Fundamental Analysis concentrates on outside factors like researching economic, political, and social considerations that have the potential to impact currency demand and supply. These include examining data such as:
Interest Rates: Foreign investment tends to be attracted by higher interest rates, leading to higher demand for a nation's currency.
Inflation Reports: Excessive inflation can reduce the purchasing power of a currency and render it less attractive.
Trade Balances: Foreign exchange of countries with trade surpluses will rise and that of countries with trade deficits can fall.
Political Incidents: A change in policy or elections or other geopolitical incidents would affect the country's economic condition and currency. For instance, a fundamentalist trader would buy Japanese yen long if it is thought that the Bank of Japan would raise the level of interest rates because a higher rate would drive the yen up relative to any other currency.
“Although technical and fundamental analysis differ in approaches, the most successful traders usually blend both approaches in a bid to make more informed and better trading decisions.If you would like to learn more about how to blend these two analyses in making informed decisions feel free to reach out to us. At Lumix Traders, we encourage continuous learning and growth. Learn more about advanced trading strategies and discover how to minimize risk and loss. Be ahead of the curve by following us on Instagram, where we provide you with a daily outlook, news, and latest trading news.”.
