Every trader reaches a point where they have to stop and ask themselves what kind of trading analysis is best for achieving top results.
Most get to this question pretty quickly after learning about the Forex market and all that it entails, but it is not an easy question to get to the bottom of. The best analysis type is often depending on the trader themselves. What works beautifully for one type of trader may discourage another from ever trading in the markets again.
This is why we must examine each option at length to get a better idea of what type of trading analysis might make the most sense in your particular circumstances.
Technical Trading
This is the type of trading that many Forex newbie’s are familiar with. This is an examination of the charts of Forex prices to find trends and entry or exit points on a given trade. The idea behind this type of trading is that the price reflected in the currency pairs at this time can be used to make rough estimates about where the price is headed in the near to medium term future.
If one becomes quite skilled at practicing technical trading, then they can potentially make a good deal of money simply trading their funds in this way. They just need to find the right setups in the charts, and they are off to the races.
However, this type of trading also requires a lot of skill and is not for the faint of heart. It is not easy to maintain level emotions when the trades that you have conducted on the basis of technical analysis turn out to not go your way. You can think that you have set everything up just perfectly, but then sometimes doesn’t pan out as your models project, and you start to spiral.
It has happened to many traders before, and it is something that has sent more than a few traders away from currency trading altogether. They get frustrated with it, and they assume that they will never have the skills necessary to become a quality trader anyway so why even bother?
All of that said, it is obvious that technical trading needs to at least be part of your strategy for timing the markets. All of the fancy tools and charts that Forex brokers put out there are not just for show. These are real tools used by real people to make wiser trading decisions that will truly make a difference in their bottom line and in their trading account at large.
Thus, you should have at least a basic understanding of how technical trading works and how it may benefit your ability to be flexible and trade well in the markets.
Fundamental Trading
Another type of trading that is commonly practiced by Forex traders of all stripes is fundamental trading. What you are looking at with fundamental trading is the concept of trading currency pairs based on news events and other fundamental economic news that might impact the currency pairs. You cannot get away from the fact that real-world events have an impact on how currency pairs trade. If you don’t know what news events to look out for, or how those news events may shape the way that the currency pair moves, then you are likely going to be very confused by the market for a long time to come.
People in the technical trading camp may suggest that all of the fundamental news is already built into the price of the pair and that you don’t need to know why the pair has traded a certain way, just that it has, and then adapt to it. They welcome that opinion, but it is not solid enough to explain everything that goes on with various currency pairs.
Fundamental analysis is important too because it can help explain when there are massive moves in one direction or another in a currency pair. This does happen sometimes, and some people may be caught off guard if they are not sure what the fundamental and underlying reasons for these moves are.
Why You Need Both
You might find yourself drawn to one camp or the other more in this debate, but you should realize that you will need both fundamental analysis and technical analysis to make informed and wise trades day in and day out.
There isn’t a trader alive who has consistently profited without using both sides of this coin at least to some respect. Which one works the best is largely a function of which one feels more natural to you, and which one you are willing to spend more time examining.
You might formulate a strategy that relies 90% on fundamentals and 10% on technical trading ideas or vice-versa, but the bottom line is that you need to do something that brings both ideas into the fold.
If you don’t have a balanced strategy, then expect major swings up and down in your trading account until you reach a point where you finally decide that it really is time to buckle down and create a more workable strategy.
If you don’t do this, then don’t expect things to work out the way that you had hoped. There is no straight answer to which method is better. The truth is, they work with each other, and you need both to make sense of the chaotic world that is Forex trading.
Given the scale of the market and the fact that it involves countries from around the world, it should be easy to accept that it is going to be a complex road ahead until you find the strategy that best suits your personality.
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