Why you need both Technical Analysis and Fundamental Analysis for your FX trading
Some traders who are new to forex trading tend to look for ways to gain an immediate edge in the market. In the process, traders tend to look for ways to understand and interpret the markets either through technical analysis or fundamental analysis. And depending on their previous experience, some traders will favour one (technical analysis) over the other (fundamental analysis).
Combining Technical Analysis and Fundamental Analysis
For some traders, it may seem easier to focus on one approach, as it seems like it would make it easier to completely master one area of the market. But when we look at the benefits that can be found when taking a more combined approach, the arguments are very persuasive.
How does Technical Analysis work and its benefits for forex traders
Technical analysis is a form of market analysis where forex traders use price charts (or price histories) to make informed decisions about the future price of an asset. This involves the use of forex indicators applied on your MT4 platform – e.g. Moving Average, Stochastic or Relative Strength Indicator (RSI) – that can help traders to view price activity in a more objective way.
This is important because it can allow you to set more precise trade entries and stop loss levels, which is something that can have a very positive effect on the size of your trading account.
How does Fundamental Analysis work and its benefits to FX trading
On the other hand, Fundamental Analysis is a form of market analysis that uses economic data to evaluate and understand the movements of a trading instrument or an asset.
This can take a bit longer than technical analysis but the rewards for this type of analysis can be just as great. Essentially, fundamental analysis gives traders a good understanding of how economic factors and events may impact the price movements of an asset or a currency pair.
Key fundamental data traders monitor closely include interest rate decisions, Gross Domestic Product (GDP), employment data, inflation rates and geopolitical events to name a few.
Positive information can then be used as a basis for a “buy” in your chosen trading instrument (Indices, Commodities or FX). Negative information can then be used as a basis for a “sell” position in your chosen asset or currency pair.
Combining Technical Analysis and Fundamental Analysis delivers better results
For many expert traders, combining these two approaches can deliver far better results than by using one in isolation.
By using both technical and fundamental analysis, the more successful traders tend to first look at an asset’s fundamentals in order to understand whether to buy or sell the asset.
Then, a savvy trader can conduct technical analysis in order to determine where exact price entries and exits can be located. By using these analyses in combination, a trader will have a more rounded and better view of an asset’s or currency pair’s potential moves and overall price direction.
Risks involved in focusing on only one form of analysis
There are some risks involved when conducting only one type of analysis. For example, a technical analysis trader who is solely looking at charts for price movements might be unaware of a particular market-moving event that is coming up. Say for instance a central bank decision, PMI data or employment numbers that could affect the movement of currencies.
These types of events can create excessive volatility that pure technical analysis might not understand. High-impact events have caused massive price whipsaws/fluctuations in several occasions in the past which saw some traders who rely solely on technical analysis to get stopped out of a position unnecessarily.
This can be costly, so it is always a better idea to have strong knowledge and understanding of both technical analysis and fundamental analysis.
Combining fundament and technical analysis is the strongest option
Forex trading is definitely an environment where it is better to have as much information as possible. By combining the power of both technical and fundamental analysis, forex traders can be better equipped and can be in a much stronger position when trading the forex markets.
And with both these types of analysis readily available through forex brokers’ platforms, it is much better to use them in combination for a more efficient forex trading strategy.