What are fundamental and technical analyses?

The pros and cons of fundamental analysis

Fundamental analysis is an idea that prices are constituted by two currency pairs, based on fundamental conditions such as the economy, national strength (economic power, growth potential), policy interest rates, and geography. To put it simply, fundamental analysis is a thinking process where, in the case of two currency pairs, traders decide which currency is superior based on the aforementioned traits and purchase that currency. When there is a boom in the world economy, currencies with high growth potential and economic power are bought, and then if the economy of those countries grows weak, traders will buy and invest in other currencies. The merit to this “fundamental analysis” is that it is often effective for long term investment as long as the trader keeps an eye on the growth potential and economic power of the country whose currency they are investing in. Fundamental analysis is more suitable for long term investors than short term ones because it looks at the overall position of a given country in an international setting.


Of course, the downside to this method of analysis is that is unsuitable for short term trading. In terms of fundamental analysis, it is impossible to analyze the timing of buying/selling, making it best to buy growth-priced units at cheaper places and then hold onto them for a long time. When using this method of analysis, traders should be careful of the timing with which they make their purchases. Even though fundamental analysis can show promise in the future, the best time to buy in the present can vary. For example, if you purchase your currency during a boom, it is likely that you will have to hold that currency for a long time before it goes up more.



The pros and cons of technical analysis

Technical analysis is an analysis method to analyze price and volume trends. Some examples of technical analysis include chart analysis and time theory. Unlike fundamental analysis, technical analysis does not analyze economic power but rather is a method used to find certain patterns and features from the trends of time, price, and volume in order to predict future prices. There are many different ways to perform technical analysis. Among the most popular methods that many traders employ are Bollinger Bands and Oscillator Systems. The pros to using technical analysis include the ability to predict the best timing to invest and when/how the prices will change. For trend followers who trade according to these trend changes, technical analysis is an indispensable tool. Furthermore, although swing traders and day traders make good use of this method, even long term position traders have been known to use it as well due to its versatile nature.


The con to technical analysis is the level of difficulty and the time it takes to both find an analysis methods that works for you and to master it. Furthermore, for short term trading styles such as scalping, there are many misleading numbers– meaning that without a clear filter or clarification of the loss cut point or reward point, you may stand to further increase an already big loss. Some traders believe that the more difficult the technical analysis method, the more profit they will reap at the end of the day; however, among the high profit turning traders in the world, there are some who make their profits by simply looking at average lines.



It is important to have a trade plan

More than fundamental and technical analyses, making a plan before you trade and sticking to it is most important. Profit and loss are secondary to having and keeping to a plan. If you execute an order and it goes wrong, it is of the upmost importance to be prepared to act without hesitation in order to avoid further loss.