Fundamental vs Technical Analysis
Updated: Aug 30
What’s the difference between fundamental and technical analysis?
This one of the frequent questions I’ve been asked throughout my trading career by my friends and colleagues mostly.
So today I’ve taken this time to help you, the reader.
First, we’ll start with defining each term before briefly explaining how they work.
Analysis: This is the detailed examination of the elements or structure of something
Fundamental Analysis: This is the analysing of the social economic and political forces
Technical Analysis: This is simply the recognizing of patterns on the price chart of a certain asset and studying the historic movement along with the current values.
Two Sections below will briefly explain how Technical analysis work along with the pros and cons of using Technical analysis.
Technical analysis is the study of historic price movements and the recognition of patterns on a chart as this can give hints about future price movements if the situation repeats itself.
Method 1- Traders analyse the historical prices and market statistics of an asset to determine where this asset is going next. Charts are the best way to visualize past prices and recognize patterns, which can give hints about future price movements if the situation repeats itself. Below are some of the patterns that technical traders look for:
Method 2 - Carry Trading, the one fact is in the forex market do not trade individual currencies, but currency pairs.
You’re buying one currency, and selling the other at the same time.
If a position is held for more than a day, (overnight fees shall be debited or credited on your account depending on the direction of your trades (long position/short position).
The differential funding rate between two currencies is the money that shall be paid or received the plot is to borrow money from a currency with a low-interest rate to buy another currency with a higher interest rate, making a profit from the difference.
The YEN has low rates whilst on the other hand, the Australian Dollar has high-interest rates this then made this pair the centre of attraction to carry traders
Three Sections below will briefly explain how fundamental analysis work along with the pros and cons of using fundamental analysis
Economic drivers are what gives a country its positive or negative economic outlook. If the country’s economic outlook is positive its currency gains in strength and vice versa.
Fundamentals co-exist well with technical, us as traders this is one of the choices we are given, and we get to pick one or both. As my mentor whose name shall be withheld said,
Fundamentals give you the why, technicals give you the when
Traders focus on economic events that trigger high volatility in the markets. Some of these events include employment figures and inflation rates, other traders find opportunities in looking at the central bank’s interest rates.
Below I have attached an economic calendar as it shows upcoming reports that may affect a forex pair hence it is one of the key tools in fundamental analysis.
Some other news events include:
Non Form payroll (NFP)
Down below will be a table, doing a quick comparison between Technical Analysis and Fundamental Analysis: