“Fundamental vs Technical Analysis

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 25.04.2020>

Dear reader,

Hi! If you are interested in online trading you should read the below that provides important information regarding the different kind of analysis that exist.

 

What is the difference between fundamental and technical analysis?

 

> Fundamental analysis focuses on the overall state of the country’s economy, such as productivity, employment, manufacturing, international trade, and interest rate.

Fundamental analysis is a way of looking at the market by analyzing economic, social, and political forces that may affect the supply and demand of an asset.

You must understand the reasons of why and how certain events like an increase in the unemployment rate affects a country’s economy and monetary policy which ultimately, affects the level of demand for its currency.

The idea behind this type of analysis is that if a country’s current or future economic outlook is good, their currency should strengthen the more foreign businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets.

Higher interest rates make dollar-denominated financial assets more attractive.

Whenever you hear people mention fundamentals, they’re really talking about the economic fundamentals of a currency’s host country. A vast collection of information – whether in the form of economic, political or environmental reports, data, announcements or events. Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand. As the economy gets better, raising interest rates may be needed to control growth and inflation. Fundamental data takes shape in many different forms. It can appear as a report released by the Fed on U.S. existing home sales. It can also exist in the possibility that the European Central Bank will change its monetary policy.

Speculations of interest rate hikes can be “priced in” hours or even days before the actual interest rate statement.

Economic indicators provide some insight into how well a country’s economy is doing.

Fundamental analysis is a valuable tool in estimating the future conditions of an economy, but not so much for predicting currency price direction. Fundamental information in the form of reports, economic data releases or monetary policy change announcements is vaguer than actual technical indicators.

The market tends to react based on how people feel. These feelings can be based on their reaction to economic reports, based on their assessment of current market conditions.

 

> Technical analysis is the framework in which forex traders study price movement.

A person can look at historical price movements and determine the current trading conditions and potential price movement.

“History tends to repeat itself “. Technical analysts look for similar patterns that have formed in the past and will form trade ideas believing that price will act the same way that it did before.

What’s more is that with all the traders who rely on technical analysis out there, these price patterns and indicator signals tend to become self-fulfilling.

Technical analysis is employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.

 

>Let’s also talk about Sentiment Analysis.

(a view or opinion that is held or expressed.)

Kidding aside, the market basically represents what all traders – you, Warren Buffet or Celine from the donut shop – feel about the market.

As a trader, you must take all this into consideration. You need to perform sentiment analysis. It’s up to you to gauge how the market is feeling, whether it is bullish or bearish.

Fundamental factors shape sentiment, while technical analysis helps us visualize that sentiment and apply a framework to create our trade plans.

 

Why are interest rates important?

The forex market is ruled by global interest rates. A currency’s interest rate is probably the biggest factor in determining the perceived value of a currency. a country’s central bank sets its monetary policy, such as interest rate decisions. Too much inflation can harm an economy and that’s why central banks are always keeping a watchful eye on inflation-related economic indicators, such as the CPI (Consumer Price Index) and PCE (Personal consumption expenditures price index).


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
Risk Warning: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. It is possible to lose all the initial capital invested.

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