When trading Forex markets which form of analysis is best for you to use? We will now try and answer the question of which method of trading is best and look at the advantages and disadvantages of each for of trading and also, how to combine both methods for better market timing with your trading signals.
Lets first look at, how effective technical analysis can help you make money with your trading signals and how, to build a Forex trading strategy for profit based on this method.
The logic of technical analysis is simple – you don't need to know why a currency pair is moving to make money from it, all you have to do is follow the price action on a chart. The advantage is – you don't need to know the fundamentals because the supply and demand equation, are discounted in the price and just as important - all the traders opinions of it are visible as well. If you simply follow trends on a chart, you can make money with your trading signals and if you look at a currency pair price chart, you will always see trends which if you execute your trading signals correctly, you can lock into for profit.
As humans, we decide the price of any commodity or currency. Over time, trader psychology has remained constant so the past will always repeat itself. This means, certain high odds chart patterns will constantly show themselves up on the charts and these can be traded for profit.
Learning to read Forex charts is very simple and anyone, can do it and even better, you don't have to spend a lot of time deciding on where a currency pair might be going, you just look at the price action on a chart and trade the reality of where the price is now.
This method is very simple to learn and very time efficient in terms of placing trades as each pair you look at, if you know the formations you are looking it will take you just a few minutes, to decide if you should place a trading signal. This method makes it the perfect trading strategy for part time traders, who want to make a great second income and also is used by pro traders. The fact that it's simple is not a disadvantage because simple Forex trading systems always work best.
So what are the disadvantages?
Price history over time, does repeat itself and this is reflected in certain chart patterns but there is no one chart pattern which is reliable all the time, as price movement is ever changing. This means, charting is an art and it takes tremendous discipline, to trade from charts successfully and hold profits and cut losses.
In addition, most traders look for hidden codes in the price action which can give them an edge and most believe, Forex prices move to science. When they devise their strategies their to rigid, with their trading rules or make their methods to complex which leads to them losing their equity.
Charting is a great way to make money trading but you must learn, to practice your art, you are only trading the odds not certainties. You need to avoid all the myths about a secret code, insider secrets or priced move to science – because they don't – its an odds market. Finally, you need top acquire the disciplined mindset needed, to apply this method correctly, get the best market timing and make money long term, with your trading signals.
The advantages of fundamental analysis are - the long term fundamental supply and demand situation prevails. Short term price spikes, are normally the product of human emotion and soon fade. The smart fundamental trader, knows the long term trend and trades with it and is not concerned about short term volatility. In addition, he can view the fundamentals and see, if they are discounted in the price and also, look for events which can cause a trend change. By looking at the conditions behind the charts, he can see events coming and how, they might effect price and also work out how much events have been discounted by the market.
Many of the world's top traders use fundamental analysis and while its seen as old fashioned way of trading by many Forex traders - if you know how to do it correctly, it can be very profitable.
So What are the disadvantages?
The big disadvantage is - the time it takes to do the analysis and how long it takes to learn to do it correctly. Any trader who has a trading strategy based on this method, needs to know about economics, have an understanding of sentiment and how it relates to the fundamentals. If however you can learn this method of trading, it is a great way to make money trading currencies.
Which is Better Fundamental or Technical Analysis?
There is no real winner here - both have their merits in terms of advantages and both have disadvantages so lets try and see which you should base your trading strategy on to become a successful trader.
Technical analysis is easy to learn and takes very little time to apply but it's an art, it can't see unexpected events and requires a lot of mental discipline to apply correctly . Fundamental analysis requires considerable research and learning and you need, to spend more time on your analysis but if done correctly, it can be very lucrative and more of the world's best performing traders use this than technical analysis.
I actually think, there is no best method of trading and as we have said both have their merit but you can combine them for bigger Forex profits.
I like to use fundamental analysis, to help me establish the long term trends and to warn me of any events coming which can skew the charts. For timing trading signals, with my trading strategy - I like to use charts to get better market timing. In the short term sentiment rules, in the long term the fundamentals prevail so for timing I like technical analysis but still like to know the conditions driving the charts which means having an understanding of the fundamentals.
There is no perfect trading strategy or method. You can make profits with both fundamental and technical analysis and which method you choose is down to the time you have and your trading personality. If you are like me though, you might want to try and combine them and if you do, you will have a trading method which you can understand, apply with confidence and discipline and make big long term profits with your trading signals – good luck and good trading which ever method you choose.