Which Type of Analysis is Best?
Basics & Industry, Forex Basics

Which Type of Analysis is Best?

Foreign exchange analysis is utilized by retail forex day traders to determine whether to sell or buy a currency pair at any point in time. Foreign exchange analysis could be technical in nature, such as using charting tools, or fundamental, using news-based events and /or economic indicators. The day trader’s currency trading system use analysis that creates sell or buy decisions when they all point in the same direction. Naturally, forex trading strategies that use this analysis are usually available for free, for a fee or sometimes, developed by the trader themselves.

Fundamental Analysis

Fundamental analysis is often utilized to analyze changes in the foreign exchange market by monitoring economic indicators, such as unemployment rates, interest rates, gross domestic product (GDP) and many other economic releases that emanate from the countries in question. For instance, a trader analyzing the USD/EUR currency pair fundamentally would only be interested in the interest rates in the United States compared to those of the Eurozone. They would also be keenly observant of any significant news releases emanating from each of the countries in relation to the health of their economies.

The basic idea behind fundamental analysis is that if a country’s future or current economic prospect is strong; their currency should strengthen over time. A very strong economy usually attracts foreign investment and businesses, and this usually means that foreign businessmen and investors must purchase a country’s currency to invest or start a business. Essentially, it all boils down to supply and demand: a country with a strong and growing economy will experience stronger demand for its currency, which will definitely lessen supply and drive up the value of the currency.

Technical Analysis

Technical analysis is a method of evaluating assets by analyzing the statistics generated by the market activity, like volume and past prices. Naturally, technical analysis does not attempt to measure an asset’s intrinsic value but instead employs charts and other valuable tools to determine patterns that suggest future activity.

Just as there are lots of investment styles on the fundamental side, there are also many different forms of technical investors. Some rely on the use of technical indicators and oscillators, while other use chart patterns and most employ a combination of the two methods. In any case, technical analysts’ exclusive use of historical price and volume data is what separate them from their fundamental counterpart.  Unlike fundamental analysts, technical traders don’t care whether an asset is undervalued- the only thing that matters to them is an asset past trading data and what information this statistics can provide regarding the direction of the asset in the future. For instance, a trader analyzing EUR/USD currency pair technically would only be interested the data from previous price action and trading volume.

Which Is Better?

It is important to note that both automated technical analysis and manual trading strategies can easily be purchased on the internet. However, traders should be aware that there is no such thing as “holy grail” of trading systems. If the trading system was the perfect forex money maker, then the seller would not be so inclined to share it. This is evidenced in how big financial organizations keep their ‘black box’ trading strategies and programs under maximum security.

Finally, there is no ‘best’ forex analysis method that trader can use. Depending on the trader’s access to information and time frame, either technical analysis or fundamental analysis could be thought of as the most viable option. For a short-term forex investor with only delayed access to information on economic data, but real-time access to quotes, technical analysis may be the preferred method. For a long-term trader or a trader with access to real-time economic data and news reports, fundamental analysis could be the most preferred option.  Forex traders are advised to try out all the method of analysis to determine which method or combination of methods works well for them at any given point in time or circumstances.