Fundamental vs. Technical analysis

Fundamental vs. Technical analysis

It is the crucial question for investors: whether the market is analyzed with fundamental or technical methods is, in addition to scientific conviction, also a creed. Both disciplines have already proven themselves. In short-term Forex trading with financial leverage, the technical analysis is particularly convincing.

The fundamental analysis deals with economic facts. When analyzing the foreign exchange market, for which developments in individual companies are hardly relevant, macroeconomic framework data and developments in the monetary policy of a currency area are primarily considered.

Macroeconomic data are primarily inflation, economic growth, unemployment and foreign trade. Fiscal policy influences – such as a high public deficit – are also part of the fundamental analysis.

“Fundi feed”: inflation, growth, foreign trade

These parameters are important when forecasting future interest rates in a currency area that, at least in theory, is decisive for the development of exchange rates. If the relative interest rate level of one currency increases compared to another currency, investments become more attractive, which leads to a greater demand for the currency with higher interest rates and thus to an appreciation.

Since at least short-term (in practice, but also long-term) interest rates are controlled or strongly influenced by the central bank, monetary policy is also being monitored with great attention. Fundamentally, analysts are trying to put it in simplified terms, using the economic framework and the statements of the central bank to anticipate their future direction.

The fundamental analysis is extremely complex and, in addition to understanding the economic context, requires a lot of research. When used correctly, however, it can deliver superior results. In the best case, it is possible to recognize a due overriding trend change in the market months or even years before it occurs. Example: A country with high and growing debt levels at home and abroad is at risk of depreciation in the long term.

Traders rely on charts and indicators

Traders rely on charts and indicators

The main disadvantage of fundamental analysis is that the market can behave irrationally for a very long time and in fact mostly does. It is of little help to short-term traders if their assessment is fundamentally correct, but they have to act against the trend. This is especially true when using financial levers, which are common in Forex trading.

Technical analysis takes a different approach. It assumes that all relevant information is already included in the course. Your instruments are trend lines, chart formations and technical indicators. Access to all relevant analysis tools is already included in practically every forex software.

When your instruments are used professionally, the technical analysis provides more concrete (if by no means certain) indications of the state of the market. Investors also recognize faster if their presumption is not confirmed and can therefore exit the market with a limited loss.