Technical Analysis vs Fundamental Analysis: Which Fits Your Style?

There are many important choices traders need to make, but few are as central as choosing their approach to the market. Technical and fundamental analyses are two of the most common ways to try to understand market movements. Each includes particular ways of sourcing information, processing it, and making decisions based on it.

Naturally, the two are not as viciously opposed as some would have you believe. Experienced fundamental traders are aware of core technical principles, and often much more, and vice versa. However, there’s no denying that traders tend to end up gravitating towards one or the other.

التحليل الأساسي

The core principle behind fundamental analysis is that it tries to discern the “true” value of an asset. This is under the assumption that the current price doesn’t match the true price. Fundamental traders bank on instruments eventually matching that true point, and make their trades accordingly.

So, how do fundamental traders aim to find this true price? They look at large amounts of data that determine an instrument’s price. Then, based on this data, they usually forecast long-term trends and make their bets based on them.

Some of the data fundamental analysis relies on is:

• Macroeconomic releases: GDP, monetary policy, inflation, trade balances, employment
• Local political events: Elections and policy changes
• Global political events: Wars, trade route disruptions, trade agreements

Most of this data is relayed via the news. The kicker is that, by the time the news has come out, big players (institutions) in the forex and CFD markets have already made most of their move. Simply put, these institutions can access vital information before it’s available to the wider public.

That’s why fundamental analysis is inherently predictive than technical Analysis. Traders who wait on the latest news to place their orders will have already missed the largest window of opportunity. Instead, fundamental traders look at the big picture, heavily analyse markets, and target the window before big events happen.

Fundamental Analysis Pros

• A big-picture perspective helps understand why things happen, which may be more comfortable for some traders.
• Useful for swing traders و position traders, as it’s more appropriate for predicting long-term trends.
• Creates trading routes based on real-world events, rather than trader interpretations.

Fundamental Analysis Cons:

• Predictive trading can be unreliable, with traders acting irrationally — underreacting, overreacting, or acting in a different course than news would suggest.
• Requires a good understanding of global economics. Something that happens in the US, for instance, can have a cascading global effect.
• Requires a good eye for the news. Tracking the news cycle, determining which news is the most impactful, and understanding how different events connect is crucial.
• Steeper learning curve, with the interaction of multiple economic factors being difficult for beginners to grasp.

التحليل الفني

التحليل الفني, on the contrary, doesn’t concern itself with the underlying factors too much. Instead, it looks at what’s happening right now and relies on trends, patterns, indicators, and various thresholds to find trading options.

In other words, you won’t hear a technical analyst ask “why?”. They are simply interested in what traders are currently doing and how other traders should react to that.

As such, a fundamental trader may spend a large portion of their day looking at news, analysing releases, and planning their trades, and a much smaller part actually placing trades. On the other hand, a technical trader would spend most of their time actively following charts and placing trades as good opportunities arise.

Key tools and indicators for technical traders are:

• Charts and indicators: Chart data and indicators like moving averages and RSI that help parse the information
• مستويات الدعم والمقاومة: Levels where instruments tend to stall, with breakthroughs being meaningful
• Trends and patterns: Ways of quickly predicting the next market move based on how markets have reacted in the past

Generally, technical analysis is much more active and engaged than fundamental analysis. It’s an analysis on the fly, with inspection and action not necessarily being separate from one another. Technical traders rely on trends, and trends pass quickly, requiring quick action.

Technical Analysis Pros:

• Offers traders a structured approach, with clear points for entries and exits.
• The strict rules for trading give some traders a sense of comfort.
• Works in all types of markets and is highly flexible.
• Focusing on price action narrows the scope, with a much easier learning curve.

Technical Analysis Cons:

• Markets don’t always behave as patterns would indicate.
• Doesn’t aim to explain why something happened, leading to difficulties in spotting mistakes and bad trading patterns.
• Can be disrupted by sudden events like news and economic releases.

Choosing the Right One for You

Based on the descriptions so far, you may have already picked your favourite. In truth, we all have propensities in real life, and based on those, we can somewhat foresee what our trading preferences will be. The keyword here being somewhat.

Someone, for instance, who enjoys reading in their free time, or another hobby that’s more of a slow burn, may think that fundamental trading is for them. Taking things slowly, carefully planning out the best course of action, and then simply executing them. Those with more fast-paced hobbies, like gaming, may find technical analysis more up their alley.

However, to know which one you like more, you need to try both. The reader may find excitement in technical trading, and the gamer may find fundamental analysis soothing. There’s no real way to know which suits you best other than trying.

Does that mean you need to spend money just to figure out which type of trading would suit you best? No!

Demo Accounts

Demo accounts are an invaluable tool in the process of learning forex and CFD trading. They let users get market experience without risking any funds of their own. That’s because demo accounts come with virtual currency – trading credits that can’t be deposited or withdrawn.

The only purpose of demo accounts is to simulate a trading environment. So, if a trader wants to try out fundamental analysis, they’ll be able to conduct their research, place trades with virtual funds, and see how these turn out.

Arguably, demo accounts are even more important for technical traders. That’s because most of the tools they use can be found in trading platforms, and demo accounts let you access these. So, technical traders can learn how to track charts, draw support/resistance levels, and use key indicators. They can also test their pattern recognition skills on real, current markets and see whether situations play out the way they expect.

Practical experience is invaluable, and demo accounts are the most efficient way of putting theory into practise. It’s recommended for traders to test out both fundamental and technical analyses, since their own preference may surprise them.

Final Thoughts: Find Your Mix

As noted earlier, it’s not necessary, or even perhaps wise to devote yourself to one type of analysis exclusively.

A smart technical trader will check an economic calendar before starting their routine, not to get caught off guard by an important announcement. If they see strange market behaviour, they may consult the news to see whether an important event has shaken up their instruments.

Conversely, a fundamental trader will look at a price chart before placing their trade. If there’s a temporary spike, they may wait until it declines so that there’s more room for potential profit. They may also rely on price data to see how an asset has reacted to certain situations in the past.

It’s important for traders to understand how to navigate the markets, but also understand their mistakes, or what they could’ve done better, for them to be truly confident. Only the right mix of technical and fundamental analysis will achieve this, so don’t be afraid to play around.

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لا تُعتبر هذه المعلومات نصيحة استثمارية أو توصية استثمارية، بل هي تواصل تسويقي.