There are two main kinds of analysis that traders do to analyze the buying and selling price. Some traders concentrate on the price action ignoring all the other factors. These types of traders hone their technical skills. Others focus on the fundamental analysis which includes studying the economic events of the world that causes the market ups and downs. In this chapter, we will take a brief look at these analyses.
Many traders check just one type of analysis to make a final buying or selling decision. However, there are traders which hone their skills in both types of analysis. There is nothing wrong in perfecting only one skill. It all depends on personal choice and interest. There are traders such as Jim Rogers whose was successful because of fundamental analysis while Martin Schwartz was successful doing technical analysis. Apart from this, it is crucial to have discipline and emotional control to become a successful trader or investor.
Difference between Fundamental and Technical Analysis
Before starting our explanation, keep in mind that whether you go for technical or fundamental analysis, the end result and trade recommendation is more or less similar.
Let’s take an example of a very common graphical form i.e. parabolic price graph. A technical analyst will analyze the chart, notice the extreme values and then finalize if it is profitable to join the trend or not. A fundamental analyst will also give the same warning about a stock, but he will analyze the euphoria in news source, consider any new declarations, etc. Practically, he will analyze the current economics of the world, especially of the countries whose currencies he is going to trade in.
You can take it as fundamental and technical analysis describe the same thing but in two different languages. However, they always arrive at the same conclusion.
Now, let’s take a brief look at these two types of analysis:
Fundamental analysis is done according to the economic data and latest news. Unlike technical analysis, this type of analysis has numerous indicators to select from. The traders focus on the indicators that determine the day to day price movement. Some of the most common indicators are financial law, politics and social attributes.
Fundamental analysts analyze the cause of the market movement due to the latest economic developments. This is unlike technical analysis which just runs on the basis of price charts and other similar tools. Fundamental analysis is inclined to identify the errors in the market which could lead to profit opportunities. A trader honing fundamental skills is always on a lookout for a wisdom of the market to evaluate trends and buying opportunities.
As a beginner, you must be thinking “how easy is it to analyze and make profits using fundamental analysis. You just need to be updated by analyzing the markets!”
Hold on; there is a catch here. While fundamental analysis is good at indicating possible errors in the market, it does not indicate when the corrections are going to happen. That is why in the case of bubbles and market extremes, the analysts just start rationalizing the unhealthy positions in the market. At this point, they just ignore the scepticism in their fundamental approach and think that the bubbles and market extremes must be correct.
What are the Advantages of Fundamental Analysis?
The greatest advantage of fundamental analysis is the ability to understand the cause that is driving the price of the currency to the desired point. By understanding the dynamics of the market, it is easy to keep the position maintained till the cause that triggered the opening of position exists. Fundamental analysts are always confident of their opened position as they know the market and the economics. They never get panicked because of the market volatility as they know what is driving the price up and down. A Good analyst is always on a track of becoming a genius. Those who make millions in the forex market are users of fundamental analysis.