10 Reasons to Focus on Fundamental Analysis and 10 Reasons to Focus on Technical Analysis in Forex Trading
One of the oldest debates in the forex trading community is the fundamental analysis VS technical analysis debate. Are you a newbie to the forex markets and confused on which side of the divide to follow? This piece takes a look at the main reasons why you should focus on each.
Reasons to Focus on Fundamental Analysis
1. It Moves the Markets
One of the biggest truths about the forex markets is the fact that it is in a range for the majority of the time. The few times when the market breaks out into a trend, there is often an economic indicator behind the move. In fact, a good proportion of trends start as a result of an economic release. The upward surge of a currency pair following the release of positive job numbers from the country can trigger an uptrend that will last for weeks. Therefore, strictly following fundamental analysis gives you a chance to only trade when the market is on the move.
2. Easy to Translate
Translating economic data in forex trading boils down to one major detail: is the data positive or negative? Positive data is good for a currency and in many cases, will lead to a surge in strength for the specific currency against others. Negative data is bad for a currency and will lead to weakness against others. Fundamental analysis traders simply watch for the implication of the released data and make trading decisions.
3. Good for Catching Long Term trends
Strong economic data like election results, interest rate decisions and in some cases, employment data can trigger trend changes or trend beginnings that could last for months. Emmanuel Macron winning the French Elections was deemed a positive for the EURO and hence it triggered a sharp uptrend across EURO pairs which lasted for over 3 months. The chart below shows EURJPY making a 1,500 pip move in that time.
4. Enables Easier Trade Planning
Fundamental analysis in forex trading is slightly different from fundamental analysis in the stock market because every month, there is only a handful of fundamental analysis data to review. Such data are published on portals such as Forex Factory where traders can then go every week to see scheduled economic data to be released by order of importance. Traders that focus on fundamental analysis simply make a note of release times with the mindset of getting into the market only during these times.
5. Gives a Reason for Volatility
The best forex traders always want to know the reason behind specific moves. Fundamental analysis gives some meaning to the chaos of the market at all times. When a fundamental analysis trader is in a trade, therefore, and volatility pushes the market against the position, the trader checks for the underlying economic data behind the volatility. The trade is exited if the economic data is high power with potential for lasting trend changes. If the “negative” volatility is deemed to be temporary as a result of the economic release pushing the move, the trade is not closed.
6. Great for Trade Hedgers
Trade hedgers set pending buy and sell orders and allow the market to trigger one of the positions. Experienced fundamental analysis traders know how to use hedging to trade economic releases. This means that they can be certain of getting into a trade regardless of the results of the economic release.
7. Offers Insight into Currency Strength
With fundamental analysis, traders know the strength of individual currencies at any point in time. Positive job numbers, for example, signifies a strong currency pair for the near term and interest rate cuts weakens a currency for the medium term.
8. High Profit Potential for Short Term Traders
Short term fundamental analysis traders in the forex markets get into positions around the time of data releases. This allows them to enter into positions with a short risk window especially with hedged positions. In practice, this means setting loss limits at logical areas while expecting the fundamental release to quickly move the markets in their expected direction. The ability to keep a lid on the risk amount while riding out the impact of the fundamental release is attractive to fundamental analysts.
9. Lower Transaction Costs
Since fundamental analysts trade with less frequency, they don’t have to pay sizeable transaction costs over the course of a trading period. Additionally, the fact that fundamental analysts trade during periods of high volatility means cheaper spreads.
10. Keeps You Away from Dull/Ranging Markets
Since we have established the fact that fundamental analysis moves the market, trading solely during and around economic data release reduces exposure during ranging markets. Fundamental analysts in forex trading go into the market when there is the highest chance of a movement.
Reasons to Focus on Technical Analysis
1. Fast Trade Analysis
Perhaps one of the main reasons why technical analysis is so popular amongst forex traders is the fact that it allows them to see at a glance, where the market is likely headed at any given time. Market movements over a period of time make is displayed on charts and the movements can then be given relevance with any of the myriad of technical analysis indicator tools available to a trader at any given time.
2. Quick Trend Identification
Technical analysis tools like the Japanese candlestick chart makes it easy for traders to see the trend at a glance. In the EURJPY image, it is easy to deduce from a glance, that the trend is up.
3. Less Time Consuming
With technical analysis, traders generally have to take a glance at the screen to decide if there is a trading opportunity at any point. There is no need for extended research and analysis as is the case with fundamental analysis. All the information you need to execute a trade can be seen in one window, within a split second. This is why non-day traders can afford to analyse their charts for 10-15 minutes per trading week.
4. Chance of Taking Advantage of Repetitive Patterns
The main basis of technical analysis is the fact that history repeats itself in the forex market. Traders watch out for patterns that have played out before and since there are millions of traders following the same patterns, the expected outcomes generally tend to happen. This is why technical strategies like support and resistance trading, double tops and bottoms trading, breakouts trading, supply and demand trading and similar all prove efficient in the long run. Many traders have been able to effectively build a trading strategy around these principles because technical analysis makes it possible.
5. Easy Trade Management
One of the banes of fundamental analysis, is that there is no telling how long a piece of data will continue to influence the market. Similarly, it is also difficult to know how the market will react to a specific release. This makes it difficult to know how to position “take profit” and “stop loss” levels. With technical analysis, such trade management issues do not exist as most technical analysis based strategies include logical levels to be targeted. This means that traders already know where they will exit the market before they execute the trade.
6. No subjectivity with trade and exits
With technical analysis, the influence of subjectivity is reduced. For example, as soon as a resistance area is reached, traders generally expect the level to hold and will look to sell. The resistance level becomes invalid as soon as it is broken. There is no room for misinterpretation. With fundamental analysis on the other hand, traders have to digest data and then interpret it according to their knowledge level. Even with supposed “white or black” data such as job numbers, the market may react against common wisdom as a result of how big players have chosen to interpret the data. For example, positive job data may be deemed “not positive enough” by the market forces, triggering a sell off on the currency pair instead of an upward rally.
7. Ensures More Disciplined Trading
Technical analysis traders often have laid down rules that they adhere to over the course of their trading career. This often involves waiting for two or more variables to agree before a trade is executed. Such rules ensure strong discipline, which is one of the most important elements of forex trading.
8. Ensures Trading of Facts
Technical analysts trade the fact most of the time instead of the perception. They wait for important variables to align before they take trade. Fundamental analysts on the other hand, trade based on HOW they expect the market to react. This means that in many cases, they are caught by inexplicable market movements that do not mirror the general expectation. For example, a fundamental analyst that sees positive CPI data for the GBP will enter a “buy” trade instantly. If the market forces decide to short the GBP instead, the fundamental trader will be stuck in a losing trade. A technical analyst on the other hand will wait for the price action after the news to decide on a direction.
9. More Trading Opportunities
The ebbs and flows of the forex market means that the technical analysts will always find trading opportunities in the market. They don’t have to wait for economic data days to trade. More trading opportunities means increased chance to put your trading edge to good use to increase profitability.
10. Multiple Tools Available for Use
A quick search for forex trading systems online throws up a plethora of technical analysis options that can be fine-tuned and backtested for use, first on demo trading, and then in live-trading conditions. Most standard forex trading platforms also come with quality built-in technical indicators.
So which is best: Fundamental Analysis Focus or Technical Analysis Focus ?
Expert forex traders over the years have agreed that the most successful traders are those that do not ignore either side of the divide. This means that no side of the divide can truly be seen as superior to the other. Trading blindly with technical indicators can lead to avoidable losses especially when trades are triggered close to or after economic data releases. In the same, jumping into trades based on economic data releases while ignoring relevant technical data can also lead to losses.
In summary, whatever side you favour, you need to ensure you incorporate the other into your overall trading system for long term success.