Forex trading has captivated investors since early 2002, when the US dollar fell to a record low and people started looking at the global currency market to make a buck. While many refuse to get caught up in forex, considering it nothing more than a mere gamble, investing has led to huge gains for many others. To be fair, that is precisely what it is.
Forex, or foreign exchange, is the process of changing one currency into another currency. According to a recent report by the Bank for International Settlements, there is more than $5.1 trillion a day in forex trading volume, making it the largest and most fluid market in the world. Forex trading specifically is betting on whether the price of a currency will go up and down in the long or short term, and investing your money accordingly into that currency.
Until now, very little consideration beyond the social forces at play in a country typically goes into forex trading, and the rest is left to luck. But there are rational, practical ways that forex trading can be approached - and they are by fundamental or technical analysis. Technical analysis is a method of forecasting that is based on the study of past price movements, while fundamental analysis is a way of looking at the forex market by analysing economic, social, and political forces that might affect the supply and demand of that currency.
Both approaches consist of numerous techniques and strategies that investors can adopt to improve their chances of achieving currency trading success. But what is a more surefire way to hedge your bets? Through fundamental or technical analysis? Here is a small breakdown on the key differences between the two, so you can personally choose which approach suits your investment the best...
Short term vs long term
A fundamental approach to analysis is ideal for ascertaining what should happen on the foreign exchange market over the long-term, while a technical approach is better for figuring out more immediate, short-term predictions - it favours shorter-term trades. Using a technical approach is also much quicker for predicting short term and quick trades.
Extensive research into a country’s political, social and economic history is required in order to make a fundamental analysis, while a technical analysis encompasses assessing all current information only. Technical analysis also differs from fundamental analysis in that the stock's price and volume are the only inputs, while fundamental analysis evaluates securities by attempting to measure the intrinsic value of a stock, and looks at inflation, GDP and interest rates to inform decisions. Fundamental analysis does not take into account currency price movements; instead, fundamental forex traders will use data points to determine the strength of a particular currency.
In-depth knowledge required vs none
Taking a fundamental analysis approach also requires a solid understanding of the market or industry, verses a technical analysis, which can be used on most trading instruments. Technical analysis requires undertaking a chart analysis, rather than a more comprehensive economic and statistical analysis.