When you trade online FOREX markets you have a choice of using charts (technical analysis) or studying the fundamentals and news stories (fundamental analysis) but which is best?
Here we will compare the two and tell you which is best for online FOREX Trading.
1. Fundamental Analysis.
The fundamental trader will look at the supply and demand situation and try and determine which way prices are going by studying and acting upon the facts.
Of course, any currency will respond to the fundamentals, but trying to trade off news stories and the facts presents a problem.
The problem is:
Prices don’t move logically and they don’t respond to the facts alone.
A simple equation will make this clearer:
Market Fundamentals + Investor Perception = Price movement.
We all see the facts, but we make our own judgments on them.
Millions of traders do this and they ultimately as a whole determine the price.
Fundamental analysis is very difficult for a trader to do, because the facts are in our world of instant communications are discounted immediately.
The market therefore moves very much on how traders view the outlook for a currency and they look towards the future.
Consider this fact
If it were easy to trade knowing the fundamentals and listening to the news, a lot more traders would make money and the fact is they don’t.
Today the information we get in online FOREX trading is more comprehensive and is delivered quicker than ever but just as 100 years ago, the ratio of winners to losers remains the same 90% lose, 10% win.
2. Technical analysis
If you have read and understood the above, you will see that technical analysis takes into account the fundamentals as the facts immediately are discounted and show up in price action .
The big advantage of technical analysis however is it does something more:
It shows how investors perceive the fundamental supply and demand position.
As human psychology has remained constant over time, it shows up in repetitive price patterns and these can be traded for profit.
Technical analysis is a better way to trade FOREX as it shows us the whole picture:
The fundamentals and more importantly, how they are perceived by the investors.
A word of caution
Technical analysis is an art and not a science.
Its limitation is that:
Humans are not predictable all the time, so there is no sure fire way to make money on every trade.
But just like a footballer who kicks penalties, knows his skill can help him hit the target the majority of the time, so to does a good chartist.
He may not win all the time but he trades with the odds and will win more than he losses.
Which is best?
As you can gather we think technical analysis is the best way to trade online FOREX.
It consumes less time, gets the odds in your favor and gives you the overall picture, taking into account both the supply and demand situation as well as investor psychology.
The fundamentals are important, but so to is how investors perceive them and this is why technical analysis is such a powerful way to seek big profits in online FOREX trading.