Fundamental or Technical Analysis — Which Is Better?
The debate between technical and fundamental analysis supporters has been going on for many years, and so far, there are no winners or losers. Most traders prefer technical analysis because it is not that time-consuming and allows traders to monitor several currency instruments simultaneously. In contrast, fundamental analysis traders tend to specialize in one currency pair because they have a huge amount of data to study. Technical analysis is suited for forex trading since the rates in the foreign exchange market change according to the trends. By perfecting their skills, technical traders can use the same tools with equal ease, regardless of the currency being traded or the time frame chosen.
What is Technical And Fundamental Analysis?
Technical or fundamental analysis is the basis of financial market forecasting. Fundamental analysis is the estimation of macro- and macroeconomic indicators, which can influence the price. For example, statistical indicators of the economy, multipliers of some companies, etc. If an investor sees that a company's financial indicators have improved or a country's GDP has increased, they buy shares or invest in a country's currency - this is fundamentals analysis.
Technical analysis is a search for tendencies in the history of quotations, and patterns, averaging price values of previous periods, finding candlestick patterns, and evaluating resistance and support levels. Or in other words, it is traded on mathematical, statistical, and graphic models which allow us to predict the further movement of the price.
Fundamental Analysis Vs. Technical Analysis: Pros and Cons
Advantages of the fundamental analysis:
● It clearly shows the factors affecting the quotes. It helps to understand what caused a price movement. Which factor is stronger, etc.
● It is the cause of volatility and a strong trend. Scalping and trend strategies are built on fundamental analysis.
● It is relatively predictable. Of course, we talk about statistics, releases, and financial statements. When it comes to force majeure situations, the quotes are affected unpredictably.
● Signal interpretation issues. If a company shows a profit in its statements, in which direction will the price move? There is no unambiguous answer. If the result is worse than the previous period, even the presence of profit is a negative factor. If investors expected a similar result, the price will not change.
● Lack of visibility with the chart. Beginning investors find it difficult to compare the result of the fundamental factor with the price movement on the chart. If the price draws three troughs on the chart, a novice investor cannot compare the information and say where the influence of the fundamental factors, and where the psychological pullback is.
● The need for constant monitoring. A fundamental investor must keep abreast of news, and understand the economy of companies, countries, and industries.
Advantages of technical analysis:
● Visibility. All information is before the trader's eyes: the nature of the movement at different time frames, figures, levels, etc.
● The availability of instruments. The hundreds of indicators, scripts, etc.
● The possibility of automation. The mathematical algorithm of indicators can be put in the code of the Expert Advisor, which will open/close positions according to specified conditions without the trader`s involvement.
● Subjectivity. There are no perfect indicators, there are many approaches to the calculation of the same model. For example, you cannot say what is better - a Simple Moving Average or an Exponential one.
● The ambiguity of interpretation. Traders have different interpretations of the indicator signals or figures.
The fundamental analysis gives preconditions of where the price will move in the future. Technical analysis shows the current trend relative to previous periods and does not guarantee that the trend will continue.
Should You Avoid Technical Analysis When Working with Fundamental Analysis?
Probably, many traders ask themselves a question: should one avoid the technical analysis when working with the fundamental one? Or vice versa, should the fundamental forecasting method be avoided if you already use the technical one?
The fundamental and technical analyses of the currency or stock market do not contradict each other. Moreover, they work perfectly together, because technical analysis allows us to see what is happening in the market.
The most successful traders combine both types of forecasting to achieve their goals. After identifying the main trend with the fundamental method, they look for confirmation on the chart, which enables them to open more accurate positions for any particular trading asset.
When you use both fundamental and technical analysis, you get an accurate picture of the market. That's why we increasingly see technical analysts looking at company fundamentals in passing, and fundamental analysts sneaking peeks at the charts.
Fundamental or Technical Analysis?
Both methods are trying to solve the same problem: determining the direction of future price movement, but they approach it from different angles. Fundamentalists look at the causes that drive the market, while technical analysts look at the results. The fundamentalist constantly asks the question, "Why?" The technical analyst thinks the reason is unimportant because price takes everything into account.
It is the understanding of the reasons, even "retrospectively," that is the psychological advantage of fundamental analysis. If you do not understand what is happening in the market, the trader gets scared and thinks that the market is unpredictable and uncontrollable.
At the same time, the disadvantage of the fundamental analysis is its lag in relation to the price. The most important trends in history began when nothing or almost nothing, from the point of view of fundamental indicators, foretold any changes. By the time fundamental analysts were able to understand these changes, the new trend was already in full swing.
It would seem that fundamental analysis is more rational, but fundamental news is often ambiguous - the same indicator values in different economic situations lead to different results. The reason is similar, but the consequences are different.
Technical analysis is an excellent method of forecasting, but it is not a panacea either. Therefore, to some extent, neither fundamental nor technical analyses are complete, but they harmoniously complement each other.
Accordingly, both technical and fundamental analyses are integral components of most trading strategies. At the same time, if technical analysis helps us choose a point to enter or exit the market, fundamental analysis helps us understand the essence, causes, and consequences of certain processes and changes, which occur in the market. The period is also important. For example, in short-term trading, technical analysis undoubtedly dominates, while in medium- and long-term strategy, the accent, as a rule, is made on the macroeconomic situation. Fundamental analysis is, first of all, an understanding of what is going on in the market, because capital movements, changes in monetary policy, and reactions of market participants to economic and geopolitical events are the basis of any significant changes in currency rates.
Fundamental Analysis Vs. Technical Analysis: Trading Tips
Build strategies based on technical analysis - the patterns work and they are given so much attention for a reason. But watch out for the fundamentals environment - they can disrupt the trend. At moments of the news release, it is better to exit the market, so as not to get a closed position on the growth of volatility with a loss of spread.
If the strategy is based on the fundamental analysis - just use it. The addition of technical analysis supplements the strategy, but the basis of it is the fundamental factor.
Observe the actions of the majority (market sentiment, strong levels), but do not hurry to repeat them. Market makers watch the majority and can purposely manipulate it with both fundamental and technical methods.
Fundamental and technical analysis complement each other. The advantage of technical analysis is its algorithmic nature - it shows recurring trends. But they can be easily disrupted by fundamental factors - it would be a mistake to ignore them. Chart analysis as a part of technical analysis takes into account the psychology of the majority - the resistance/support levels, and patterns are formed due to the fact that most traders, without collusion, perform the same actions. But as soon as something significant happens, the same majority will reverse the trend in the opposite direction, contrary to the technical analysis. Still, such situations are not uncommon in the cryptocurrency world (the power of Elon Musk's tweets), or the stock market (recall how retail traders beat hedge funds).