5 – Fundamental and Technical Analysis

What is the difference between fundamental and technical analysis?

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The technical analysis and fundamental analysis are two types of analysis used in the forex market. Technical analysis analyses the price movement and makes use of it to forecast future price movements. Fundamental report on the other hand, investigates the economic and financial factors that affect currency rates.

The two methods of analysis are tools for conducting research and projecting some future support trends in currency prices are much like every other form of investment procedure that has the support and refuted by others.

The fundamental analysis evaluates the forex market by trying to estimate the intrinsic value of currencies The Fundamental analysts look at different factors including the overall state of the economy, the conditions of the forex market and companies’ management. They consider the incomes, expenditures, assets, and liabilities of companies while analyzing the financial market ( Some examples includes Interest Rates, GDP, CPI, Unemployment Rate, Trade Balance and Retails Sales of a Country ).

Technical analysis on the other hand only considers currency's price and the traded volume. The critical conjecture in technical analysis is that all fundamentals are factored into the price and therefore doesn’t necessitate any close study of them. Technical analysts do not try to estimate the intrinsic value of a currency. They utilize stock charts to discover patterns and trends that signal the price movement of currency in the future.

The most well-liked types of technical analysis indicators are simple moving averages, support and resistance, trend lines and momentum-connected indicators.

Simple moving averages are indicators that assist traders to access currency trend by making use of average day to day currency price across a fixed period. This indicator will generate a buy and sell signal when a shorter period moving average crosses a more extended period moving average.

Support and resistance make use of price history to analyze the market and predict future currency prices. Support commonly covers places or positions where buyers entered the market previously while resistance determines positions where sellers stopped further increment of currency prices. Forex traders aim to buy at the support level and sell their currency at the resistance level.

Trend lines are much like the support and resistance because they provide traders with clearly defined entry and exit points. Nevertheless, their difference is that they are estimated using the way currencies traded previously. They are frequently used for currencies advancing to fresh highs and fresh lows without any previous price history.

Examples of momentum-based forex indicators are the Bollinger Bands, Chaikin fund Flow, stochastics and moving average convergence divergence (MACD). Each of these has distinct formulas and offer buy and sell signals. However, their criteria for providing signals differ. Momentum indicators are used in range-bound markets or trendless markets.

Tools of the Trade

Technical analysts commonly start their analysis with charts, whereas fundamental analysts begin with an analysis of financial statement.

 Fundamental analysts estimate the value of a company by investigating the revenues statement of the company, its balance sheet and how they manage their cash flow. This implies they determine the intrinsic value of a company. If a stock price trades under a company’s inherent value, for example, it would be considered as a good investment and the opposite situation is the case for the not so excellent investment opportunity.

Technical analysts don’t think that it is necessary to investigate the financial statements because the prices of currencies already carry such pertinent data. They thus concentrate more on the analysis of stock chart for indications of the direction of the price movement.

Time factor

The Fundamental analysis considers a long-term investment approach while a technical study is involved in the short-term advance. Although currency charts are presented in weeks, days, or even minutes, fundamental analysis frequently considers data over several quarters or years.

Trading and Investing in the two analysis methods

Technical analysis and fundamental analysis are used for opposing goals. Technical analysts try to discover some short- to medium-term trades whereas fundamental analysts only make a long-term analysis.  The technical analysis relates more to house flipping where an investor purchases the home and flips it to make profits while fundamental analysis is more like someone who buys a home to live in it for a long period.

All the information in the website is for educational purpose only. Your capital may be at risk. This material is not investment advice.

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