Fundamental vs Technical Analysis

<p>When it comes to trading, there are two main schools of thought around analysis, fundamental analysis and technical analysis. These methods are used to analyse trading opportunities but with very different tools and philosophies.</p>
<p>Here we take a look at fundamental and technical analysis, the key differences between them, as well as the best times to use each one.</p>
<h2>What is Fundamental Analysis?</h2>
<p>Fundamental analysis attempts to find the true value of an asset by looking at the underlying economic, social and political factors that can affect supply and demand.</p>
<p><img decoding="async" loading="lazy" class="aligncenter size-full wp-image-23753" src="https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image4-5.png" alt="" width="500" height="300" srcset="https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image4-5.png 500w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image4-5-300×180.png 300w" sizes="(max-width: 500px) 100vw, 500px" /></p>
<p>When it comes to stocks, fundamental analysts try to determine what a company is really worth and contrast that with what the current market price is to see if the stock is overvalued or undervalued. In forex, fundamental analysis focuses more on economic factors that can affect currency values. Some of these factors include;</p>
<h3><b>Interest rates</b></h3>
<p>Interest rates are one of the most important factors that can affect currency values. Central banks use interest rates to manage inflation and economic growth, so changes in rates can have a big impact on currency values. For example, if a country’s central bank raises interest rates, it will usually cause the value of that currency to rise as investors flock to take advantage of the higher returns relative to currencies where interest rates have not gone up.</p>
<h3><b>Inflation</b></h3>
<p>Inflation is another important factor that can affect currency values. When inflation is high, it means that prices are rising and purchasing power is falling. This often leads to central banks changing monetary policies, which can lead to a decrease in the value of the currency. For example, if a country’s inflation rate is higher than its trading partners and central banks keep interest rates low, its currency will usually decline in value. However, if central banks react by raising rates, then the currency will typically rise in value.</p>
<h3><b>Employment</b></h3>
<p>Employment numbers are closely watched by forex traders. Higher employment usually leads to higher wages and increased spending, which can boost economic growth. However, too much growth can lead to inflationary pressures, so it’s essential to watch these numbers closely.</p>
<h3><b>Gross domestic product</b></h3>
<p>Gross domestic product (GDP) is another important economic indicator that can impact currency values. It measures the total value of all goods and services produced in a country and is used to gauge the health of an economy. Generally speaking, a strong economy with GDP growth higher than in other countries will lead to a stronger currency, while a weak economy will cause the currency to decline.</p>
<h2>What is Technical Analysis?</h2>
<p>Technical analysis is a method of predicting future price movements by looking at past price data and market trends. Technical analysts believe that price patterns tend to repeat themselves, so they can be used to predict future price movements. Technical analysis can be used with other forms of analysis, such as fundamental analysis.</p>
<p><img decoding="async" loading="lazy" class="aligncenter size-full wp-image-23756" src="https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image1-7.png" alt="" width="998" height="567" srcset="https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image1-7.png 998w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image1-7-300×170.png 300w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image1-7-768×436.png 768w" sizes="(max-width: 998px) 100vw, 998px" /></p>
<p>Source: Medium.com</p>
<p>Technical analysts use a variety of tools and indicators to try and identify market trends. Some of the most popular technical indicators include;</p>
<h3><b>Moving averages</b></h3>
<p>A moving average is a lagging indicator that smooths out price data and makes it easier to identify market trends. Moving averages are calculated by taking the average price of an asset over a certain period of time, such as 10 days, 20 days, or 50 days.</p>
<h3><b>Support and resistance levels</b></h3>
<p>Support and resistance levels are key areas where the price of an asset has difficulty breaking through. These levels can be used to identify potential reversals in the market.</p>
<h3><b>Trend lines</b></h3>
<p>Trend lines are used to identify the direction of a market trend. They are drawn by connecting two or more low points in an uptrend or high points in a downtrend and extend into the future where they can act as a dynamic source of support and resistance.</p>
<h2>5 Differences Between Fundamental and Technical Analysis</h2>
<h3><b>1 Analysis tools</b></h3>
<p>Typically, fundamental analysis relies on data such as economic indicators, while technical analysis uses price data and market trends. As explained earlier, fundamental analysis focuses on factors that can affect currency values, while technical analysis uses past price data to predict future movements.</p>
<h3><b>2 Time horizon</b></h3>
<p>Fundamental analysis tends to focus on long-term factors affecting prices, while technical analysis will often focus on short-term price movements. This is because most economic factors don’t change quickly and often take a while to impact prices, while market trends change frequently. </p>
<p>This is why short-term trading strategies like scalping and day trading tend to focus on technical analysis to determine entry and exit points. </p>
<h3><b>3 Price targets</b></h3>
<p>Fundamental analysis is typically used to identify good value and poor value, while technical analysis is used primarily for identifying entry and exit points. This is because fundamental analysts will look for periods when prices revert back to their “fair value.” In contrast, technical analysts often look for periods when prices will likely continue to move in the same direction as the current trend.</p>
<h3><b>4 Objectivity</b></h3>
<p>Fundamental analysis is often considered to be more objective than technical analysis, as it relies on data rather than interpretations of price action. One of the criticisms of technical analysis is that it can be subjective, as different analysts can interpret the same data differently. For example, two analysts could look at the same chart and come to different conclusions about where the price is headed. Conversely, fundamental analysis is considered more objective as it focuses on economic indicators. However, oftentimes economists will also disagree about the state of the economy and the likely future direction of currencies.</p>
<h3><b>5 Trading Vs. Investing</b></h3>
<p>Most retail traders focus on technical analysis as it can be used for short-term trading strategies. In contrast, fundamental analysis is more often used by long-term investors, as it can take months or even years for economic indicators to have an impact on prices.</p>
<h2>Combining technical and fundamental analysis</h2>
<p>While technical and fundamental analysis are two different approaches, they can be used together to get a complete picture of the market. Many traders use both types of analysis when making trading decisions.</p>
<p>For example, a trader might use fundamental analysis to identify a currency or stock that is undervalued and then use technical analysis to identify an ideal entry point. Alternatively, a trader might use technical analysis to identify a trend and then use fundamental analysis to confirm that the trend is likely to continue.</p>
<p>The reason this combination is essential is that fundamental and technical analysis often provide different information about the market. Fundamental analysis looks at long-term factors affecting prices, while technical analysis focuses on short-term price movements. By using both types of analysis, traders can get a complete picture of the market and make better-informed trading decisions.</p>
<p>Ultimately, both strategies complement each other and can be used together to improve your trading.</p>
<h2>Example of how to use fundamentals &amp; technicals</h2>
<p>For example, let’s consider a possible trading opportunity in EUR/USD.</p>
<p><b>EURUSD Fundamental analysis</b></p>
<p>Inflation is slowing down in the United States, while inflation is rising in Europe. The US Federal Reserve has been raising interest rates for a year, while the European Central Bank just raised rates for the first time. EUR/USD has fallen below parity and you now believe it is fundamentally undervalued. You suspect the Fed is about to pivot to keep interest rates unchanged, while the ECB will continue its hiking cycle. In such a scenario, the euro might rise versus the US dollar.</p>
<p>To confirm this, you see that the COT report shows large speculators have also turned net bullish on the euro.</p>
<p><img decoding="async" loading="lazy" class="aligncenter size-full wp-image-23759" src="https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image2-9.png" alt="" width="870" height="479" srcset="https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image2-9.png 870w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image2-9-300×165.png 300w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image2-9-768×423.png 768w" sizes="(max-width: 870px) 100vw, 870px" /></p>
<p>Source: MyFXBook.com</p>
<p><b>EURUSD technical analysis</b></p>
<p>You see that EUR/USD has broken above a downtrend line, signalling the possible end of the downtrend. There is also a rising channel that has formed, suggesting the possible beginnings of a new uptrend. </p>
<p><img decoding="async" loading="lazy" class="aligncenter size-large wp-image-23762" src="https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image3-8-1024×567.png" alt="" width="680" height="377" srcset="https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image3-8-1024×567.png 1024w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image3-8-300×166.png 300w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image3-8-768×425.png 768w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image3-8-1536×851.png 1536w, https://www.keytomarkets.com/blog/wp-content/uploads/2023/06/image3-8.png 1598w" sizes="(max-width: 680px) 100vw, 680px" /></p>
<p><b>EURUSD trade idea</b></p>
<p>You decide to go long so long in line with your fundamental view and on bullish technical signs. </p>
<p>However, you know your fundamental view might be wrong and the downtrend could easily resume. You decide to go long EUR/USD while the currency pair remains above its newly-formed rising channel. If it drops below the channel, you cut your losses and wait for the next opportunity. </p>
<h2>FAQs</h2>
<p><b>What is the difference between technical analysis and fundamental analysis?</b></p>
<p>Technical analysis focuses on price data and market trends, while fundamental analysis looks at economic indicators and other factors that can affect currency values. Fundamentalists believe that prices will eventually revert back to their “fair value,” while technical analysts believe that prices will continue to move in the same direction as the current trend.</p>
<p><b>Is technical analysis or fundamental analysis better?</b></p>
<p>There is no definitive answer, as both approaches have their own advantages and disadvantages. Many traders use a combination of both technical and fundamental analysis when making trading decisions.</p>
<p><b>What are popular technical indicators?</b></p>
<p>Some common technical indicators include moving averages, support and resistance levels, and Bollinger Bands.</p>
<p><b>What are the best fundamental indicators?</b></p>
<p>Some common fundamental indicators include GDP, inflation, and unemployment data. These indicators can give you an idea of a country’s economic health, which can impact currency values.</p>
<p>The post <a rel="nofollow" href="https://www.keytomarkets.com/blog/education/learn-trade-forex/fundamental-vs-technical-analysis-23752/">Fundamental vs Technical Analysis</a> appeared first on <a rel="nofollow" href="https://www.keytomarkets.com/blog">Key To Markets Blog</a>.</p>