There are two main ways of thinking about how to analyze the Forex market.
One is known as fundamental analysis, and it involves examining the entire economy of a country. Advocates of this broad perspective contend that by examining a range of economic indicators that provide a comprehensive picture of the state of an economy, price patterns can be forecast.
The alternative perspective is known as technical analysis. Technical analysis is based on the fundamental idea that prices follow patterns and that future prices can be predicted by examining historical price patterns.
Which one, though, is superior?
Integrate Technical and Fundamental Analysis
Actually, neither, to be honest. In order to become a profitable trader, you must integrate the two forms of analysis. Restricting oneself to only one or the other can only lead to trouble.
Why?
Because you’re only seeing half of the picture when you employ one way. Allow me to illustrate my idea with an example.
Assume you are a rigorous technical analyst who finds no application for fundamental research. “For what purposes do I need to examine economic indicators?” you ask. “I have my price charts, and I know they won’t fail me!”
You start to notice an opportunity developing as you go over your charts. Three or four indicators point to the impending occurrence of a significant breakout. The US dollar is poised to surge and make a beeline for it. After making the trade, you simply sit back, kick back, and watch the price rise.
Then, though, something amusing occurs. There is a 50 pip price decline!
What on Earth Just Took Place?
You turn off your computer in disgust and turn on the TV in time to see the financial report. The most recent unemployment statistics, which were just made public, turn out to be significantly higher than anticipated. Simultaneously, one of the biggest companies globally declared that their profitability had far above their projections, and they anticipated that sales would remain weak for the upcoming quarter.
These two factors significantly threw a kink in the price surge you had anticipated. You may have predicted this one if you had combined a little fundamental research with all of the price charts you were so intent on studying.
Naturally, using fundamental analysis by itself is not the answer. Fundamental analysis from a broad perspective is excellent in spotting broad trends in price movement, but it lacks the depth of detail necessary to indicate entry and exit locations. You may be aware that there will soon be a price hike for the Swiss franc, but by how much? When should you sell something after you’ve bought it?
You can only be a successful trader if you integrate both strategies into your trading system.
SEE ALSO: Why Technical Analysis Is Important for Trading Stocks
Thao Pham