The Difference Between Fundamental And Technical Analysis
The difference between fundamental and technical analysis can seem rather minimal. If you are anything like me, you may ask: “Why do I need to choose one method over the other?” There are many analysts out there that focus on using one method over the other. My purpose here is not to debate which approach is superior. Instead, my goal is to explain the difference between the two to give you a better understanding of both fundamental and technical analysis.
Fundamental analysis is fundamental.
Fundamental analysis is the research, study and/or analysis of economic factors that might influence company performance. This analysis is sometimes referred to as “top down” analysis because it starts with the larger economic picture before getting into details about a specific company.
Technical analysis is technical.
Technical analysis is used to describe the use of charts in order to analyze securities. Basic fundamental analysis involves looking at ratios, historical trends, and common variables. Why is technical analysis necessary? A charting program can make it easier to spot historical trends within trading securities. Are you looking for more information about technical analysis vs fundamental analysis? I can help you with this!
Fundamental analysis is future-oriented.
Fundamental analysis is future-oriented. It looks at the underlying factors that influence currency prices. These factors can include:
- Government policies
- Interest rates
- Inflation and deflation
- Economic growth
- Political stability
It focuses on the macroeconomic factors that will influence a currency’s value. For example, if the United States economy is strong and unemployment is low, then the dollar will likely be strong against other currencies in the short term.
Technical analysis is past-oriented.
The technical analyst focuses on the past movements of a market and uses that knowledge to predict the future price movements of the market. The technical analyst will look at the price history of an asset and attempt to identify trends and patterns in order to make their trading decisions.
For example, if a trader notices that the market has just undergone an extended period of consolidation and shows signs of breaking out of this pattern, then they might decide not to trade until after this occurs because they believe it will lead to increased volatility going forward. Or perhaps they notice that there has been an increase in volume over time along with a strong uptrend for several weeks now; this might lead them to believe that there could be some sort of short-term correction coming soon, so they decide not to make any trades until after this happens because they don’t want to be caught
Fundamental analysis involves actual data and information.
Fundamental analysis involves actual data and information. It is the study of economic and financial factors to determine how they will affect a currency’s value. Fundamental analysis looks at macroeconomic indicators such as gross domestic product (GDP), interest rates, unemployment rates, government spending, and other factors to predict future trends in currency prices.
Technical analysis involves perceived patterns.
Technical analysis involves the study of charts and graphs. A trader will try to identify any perceived patterns in the market, then use those patterns to predict where the price of a currency pair will go next.
The most common type of technical analysis is candlestick charting. Candlestick charts show the high, low, opening price, and closing price for each time period (usually one day or one hour). The shape of the candlestick indicates whether prices went up or down during that time period. For instance, a candle with an upward-pointing long wick indicates that there was a big rally during that time period; conversely, a candle with a downward-pointing long wick shows that there was a big sell-off during that time period.
Fundamental analysis is a long-term view.
Fundamental analysis is a long-term view. This means that fundamental analysts don’t care about yesterday’s news or even last week’s—they’re looking at what’s going on in the world today, as well as how it might affect things in the future.
For example, if you’re an oil company CEO and you want to know if you should buy more oil futures because your company will need more fuel in the coming months, then you’ll use fundamental analysis. You’ll look at factors like current demand for oil and predictions for future demand, along with other factors like oil prices and interest rates (which affect how much money people have to spend on buying things).
Technical analysis is a short-term view.
This means that technical analysts only care about data from yesterday or last week (or maybe even longer). They don’t care about anything that happened before that because it’s not really relevant; instead, they focus on charts and graphs of past price movements to predict what might happen next.
Fundamental analysis relies on real facts and news.
Fundamental analysis looks at all of the factors that could impact the value of a currency pair in the future. These include economic conditions, political events and even natural disasters. Fundamental analysts also look at how these factors will affect interest rates, which is one of the most important drivers when it comes to making profits from trading forex.
Technical analysis relies on emotions and crowd psychology.
Technical analysis relies on emotions and crowd psychology. It looks at patterns in price charts over time to predict future price movements. Technical analysts believe that prices move in cycles and that these cycles repeat themselves over time, which means they can be used to predict future price movements. The thing about technical analysis is that you don’t really know why the cycle repeats itself—it’s just something that happens when people trade currencies all together at once (like when there’s a big news story).
The two methods for analyzing the forex market have their own merits and should be used in unison to gain a stronger understanding of forex behavior, positioning, and trends.
Essentially, the difference between fundamental and technical analysis is that the former tracks economic factors and news, while the latter tracks statistical data. Considering both forms of analysis when making forex trades will help you avoid letting your emotions get in the way of your decisions. It will also help you better grasp why a certain currency is rising or falling, as well as assist you in buying at the right times and selling at the right times.