Analysis is the foundation stone of forex trading and all traders, irrespective of whether they indulge in self trading or act in capacity of forex managed accounts providers rely on analysis for making forex investing decisions. Venturing out into this vast global market without having referred to any kind of analysis is akin to descending in a battlefield without being fully equipped with a shield or armor for protection. Therein lays the importance of analysis and the urgency on behalf of the trader to cultivate an in-depth understanding pertaining to its various components.

In the forex market analysis is of three types – fundamental, technical and sentimental, of which it is the first two which play a seminal role in determining the fate of forex investment. Both are completely distinct from each other and contribute towards the devising of trading strategies in their own different ways – a fact which is acknowledged by experienced traders, forex experts and managed forex accounts providers alike. Another fact which is agreed upon by seasoned traders is that the best way to understand the difference between the two would be to learn their characteristics which have been enumerated and explained as follows:

Technical Analysis –

·        At the mention of the term technical analysis, the first image conjured in the mind of a trader is that of a chart. This because the very basis of this analysis entails studying various types of charts like price charts, line charts, bar charts and candlestick charts.

·        These charts indicate the trends and patterns of the market and therefore carry a lot of significance while making a forex investment.

·        The old adage ‘History repeats itself’ never held more true than in case of forex markets as trends in this market have a tendency to follow the same pattern in spite of being years apart and this is the gift of technical analysis to traders.

·        Courtesy of technical analysis, even key support and resistance levels are indicated to traders which could translate into huge profits or minimal losses.

·        Momentum, moving averages and formation of a trend are some of the basic details which are provided by technical analysis.

Fundamental Analysis –

• This form of analysis comparatively has more long term impact on the currency movement as many of the factors involved impact the market conditions on a global scale.
• In fundamental analysis, it is the supply and demand which is under the scanner as it is a reflection of the strength of the economy, trade balance and foreign investment. Therefore, it is one of the most important considerations while chalking out trading strategies.
• Forex investment is often directly influenced by periodic indicators as released by Government and academic sources after every week or month in form of interest rates, orders for durable goods, retail orders and so on. Keeping track of these by forex managed accounts providers as well as individual traders forms a part of fundamental analysis.
• Fluctuations in interest rated and their after-effects influence currency movements which is why they should be borne in mind while formulating trading plans.
• International trade is an indicator of currency movement and therefore an essential aspect of fundamental analysis.

Although there are strong advocates of both forms of analysis, a wise trader is the one who relies on both technical as well as fundamental analysis while trading. Historical events have been profound proof of the fact that extremism has always resulted in downfall and forex trade is no exception to this rule. Hence, instead of using only one form and gaining a lop-sided view of the market, it is better to use both and gain a panoramic scene.

On practical terms, assume that a trader wakes up one day to find a miraculous trading opportunity which appears to be extremely promising financially. Checking all the charts which technical analysis comprises of confirms his belief that it is indeed a lucrative trading opportunity which knocks only once. In his excitement, the trader fails to check the fundamental analysis indicators relevant to the situation and invests a lion’s share into the currency pair. The first surprise is when the trend starts reversing all of a sudden and this is soon replaced by the jolt that the major reversal in trend is due to some political or economic upheaval in some other corner of the world, like the tsunami in Japan. Thus the entire investment goes down the drain – a situation which could have been avoided had the fundamental analysis been taken into account before placing the order.  

All traders and managed forex accounts providers must remember that in forex investing too much of anything is never favorable and that both technical and fundamental analysis has its own importance.