Technical vs. Fundamental, which is Better?

Written by@非一菜 click to check the original article

Before I start, let’s have a little survey. How did you enter the foreign exchange market? Have you had any trading experience in other financial instruments before trading forex?

No matter when or under what circumstance, I believe that most people come with interest and desire to make money, but it is not so easy to get what they want. According to research, more than 75% of traders give up trading after 2 years of trading, 90% of traders leave after 4 years of trading, and more people are hesitating to leave or stay. There are only a few people who stay till the end.

Trading journey is difficult in itself, and forex trading is even more difficult. Like a career, it requires continuous learning, experience, and diligence. Although losses are the norm, if a good strategy is found, forex trading can bring good result.

Here I have to mention forex trading methods, especially the technical and fundamental, the most prominent ones. Many newcomers start to trade with technical.

Technical

The reason why the technical analysis is self-contained is that there are many people who enjoy it. On the one hand, the technical analysis has a low learning threshold and easy to start. One candlestick chart and several moving averages are all you need. On the other hand, most of analysts and trading commentators do not understand the fundamentals themselves, so their work is based on technical analysis. Fundamental trading is indeed too professional and requires a lot of underlying knowledge, so the threshold is much higher.

Although the technical analysis is simple and easy to learn, it does not mean that you can easily profit from it. Some people think that the method of trading is very simple, just use candlestick, moving average and other indicators to understand the graph, but if you can’t understand the meaning behind it, there is still a long way to go.

Because it is a highly leveraged trading, foreign exchange is more like a short-term game. You cannot hold a 100 leveraged US dollar or gold position for decades like Buffett holds stocks. The high volatility under the effect of high leverage is the root of margin call. Therefore, short-term investment has become the most important way of foreign exchange trading, and intraday trading is also the most common.

If you want to play a game, you have to play according to the rules of the game. In real trading, you need to be able to understand the market trends and directions in detail, identify potential trading opportunities, distinguish support pressure levels, find suitable buying and selling points, use different strategies when encountering different market conditions, and be good at position management and stop-profit and stop-loss plan, etc. As for the so-called "follow the trend", don't chase the rise or the fall. For those technical analysts, don't believe or rely too much on them. Any predictive analysis is subjective. If you blindly believe in this analysis, you will project your own subjective judgments on the market, and you will not be able to get a full picture of the market.

I started forex trading from the technical side. I fully agree with the three major assumptions of technical analysis: history will repeat itself, prices fluctuate along trends, and price trends reflect all basic information. Those who have read the book "Memoirs of a Stock Master" should have a deeper understanding of the essence of Dow's theory. Discovering the laws of market price changes is only the basic method, and understanding the essence behind price changes is the most critical.

Fundamentals

If you only know the technical aspects and want to make a profit in forex market without any worries, you are day dreaming. The market is changing all the time. Your trading is more like a process of constant trial. The same mistakes will appear repeatedly. This requires you to adapt to changes, manage yourself, and take the market seriously.

For example, in March 2020, the outbreak of pandemic led to negative oil prices, and the subsequent rebound in oil prices. If you do not understand the changes in oil price supply and demand and the OPEC organization's production reduction plan, you may struggle to find support during the decline, but the market will kill the longs every minute; you may also lose the subsequent year-long large-band bull market for crude oil. If you understand some of the Federal Reserve’s QE and the large subsidies of the US fiscal stimulus plan, you will know the ins and outs of this wave of decline, at least not to do more to rebound on the way to the decline.

Many people think that the fundamental analysis is to read the news, watch the news, pay attention to non-farm payrolls, etc. It is undeniable that data plays an important role in the market, but that is not enough to be a professional. Trading relies on your own understanding of the market, your true insight and judgment.

Fundamental analysis requires knowledge of multiple aspects:

1. Basic financial knowledge

This is the most basic. You need to understand at least some common sense of economics and finance, such as macro and micro economic theories, the relationship and influence of changes in interest rates and exchange rates, and the relationship between commodity prices and market supply and demand. Understanding these will make you respect the market.

2. Familiar with trading currencies, product attributes and national fundamentals

Each trading variety has its own unique characteristics. The relationship between currency and its country is like the relationship between stocks and companies. If you don't even understand the basic situation of the country where the currency belongs, there is no way to make money in a stable manner.

Take Australian economy as an example, it is mainly dependent on commodity exports, and the export destination is mainly China. Then the strength of the Chinese economy and import demand are the keys to the quality of the Australian economy, which in turn affects the exchange rate of the Australian dollar.

3. Understand the central bank monetary policy of major countries

The central banks of various countries determine the monetary policy of each country, and the easing and tightening of monetary policy affects the amount of money flow in the market, which in turn affects the prices of various assets, including currencies. The most typical examples are the Federal Reserve and the European Central Bank.

4. Understand economic data

I believe that many people have paid attention to the economic calendar. Almost every day, different national economic data indicators are released, reflecting the economic status of the countries, such as GDP, CPI, PPI, PMI, NFP, unemployment rate, etc., The changing trend of these data not only affects the current financial market, but may also indicate the future economic development trend of this country. If the trend and influence of these economic indicators can be correlated, it may also affect the formulation of future monetary and fiscal policies.

5. The correct way to watch 24-hour financial news

In the era of Internet information explosion, we are faced with massive amounts of information every day, which may miss key news or take a wrong reaction to a certain piece of news.

Those traders who are attracted by panic news headlines sometimes make bad trading decisions because emotions may occupy the commanding heights. The best way to deal with unexpected news and market conditions is to get rid of noise and better understand the economy and finances. The cyclical nature of the market, the Fed cannot raise interest rates 6 times a year and cut interest rates 6 times again. Don’t be distracted by the headlines, systematically study macroeconomic data and focus on long-term trend changes [the key] is the key .

6. The strong and weak correlation of currencies

Forex is trading one currency against another, and the correlation between the two currencies is sometimes positive and sometimes negative; sometimes the correlation is strong, and sometimes weak.

For example, the vaccination speed in the euro zone economy has been significantly accelerated since April, and the vaccination rate in the United States has slowed down significantly after April. So, the euro has appreciated by 3.9% against the U.S. dollar since April, while the U.S. dollar has risen first around the watershed in April. After falling, the correlation between strength and weakness is very clear.

Conclusion

Technical and fundamentals are not the same, but they can complement each other, because the market affects prices, and prices also reflect market information. When you have strong technical analysis capabilities, supplemented by fundamentals as support, your trading will be even more powerful!

The foreign exchange market is a very tempting and challenging market. Only by mastering more trading methods can you be able to know well and not panic in trading, then perhaps you are not far from profiting. I hope everyone will go further and further on the road of successful trading!