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This article will expound some of the differences between Technical Analysis and Fundamental Analysis and explain a bit about each type of trading. Excerpts are taken from the well-known book 'Market Wizards' where Jack Schwager interviews Ed Seykota and Bruce Kovner.
Ed is a trend trader who uses technical analysis and also trusts on 20 years of experience. He definitely underlines his confidence on technical analysis. The priorities of Ed when trading are the long term trend, the current charts and getting a good point to buy or sell, in that order. Bruce says technical is the best and useful but by no means ignores fundamentals. It is important to note that technical analysis is a critical method of understanding the history of market movements and therefore useful to recognize trends. It does not actually show us where the currency pair is going but analyses the historical data. We have to use our own intelligence to see what the activity of trading says about future trades. Technical Analysis is similar to taking a patient's temperature. To ignore it is ignorance and it can show you whether a market is active or cold and resting. It also picks up unusual behaviour. Anything which creates a new chart pattern is something unusual. He also says "Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes." These are the fundamentals which will help to suggest whether a trading value will increase or decrease. Everything which makes a country tick in Forex terms. Consumer spending, government spending, employment cost index, government policy, political concerns and even an individual event can influence the market. In short the fundamentals will suggest the direction of a price but not exact prices. The chart analysis or technical analysis is better for that so with both together you can really enhance your chances of getting some pips. The reason technical analysis is so often used is that many traders use charts to trade and at any given time will be drawing the same lines of resistance and same lines of support. So if you can read the charts you have a good possibility of forecasting market movements. The best way to learn about the effect of fundamentals is to learn one piece of economic data at a time. This will help you to make better trades. |
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