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Chapter 2: What's the Difference Between Technical and Fundamental Analysis?
When you get started in Forex trading, you will hear the terms technical analysis and fundamental analysis thrown around a lot.
We don't know about you, but the first questions that came to our minds when we were starting out, were:
- What do those terms mean?
- Which one is better?
These are perfectly natural questions, so let's get into it.
What are Fundamental and Technical Analysis?
These are the two primary ways that Forex Traders make decisions to buy or sell currencies. Some traders will only use one or the other, but most traders use some combination of both.
This type of analysis uses chart patterns to spot potential trading opportunities. When people first hear about technical analysis, many dismiss it as voodoo or something that cannot possibly work.
But once you start to dig into technical analysis, you will probably realize that there is something to it. Even if it does not become your preferred method of making trading decisions, there are many Traders around the world that use technical analysis to make a living.
We will get more into technical analysis in the next chapter. But even if you think that technical analysis is nonsense, we invite you to keep an open mind.
Technical analysis basically charts human behavior, similar to how an EKG machine charts heartbeats.
…and human behavior, at its core, has not changed for thousands of years.
When traders make trading decisions based on fundamental analysis, they use news events or economic indicators to spot potential trading opportunities.
For example, they may decide to buy a currency, based on the country raising their interest rates. Or a Trader may choose to short a currency because a country is going to war.
Whatever the case may be, fundamental analysis can give traders a good reason to get into a trade and stick with it.
You will learn more about fundamental analysis in chapter 4.
Which One is Better?
There is no such thing as right or wrong, when it comes to the type of trading analysis you use. All that matters is that the strategy makes sense to you and it makes money consistently.
Which brings us to our first tip…
It's a lot like vehicles.
If everyone in the world had enough money to buy any car they wanted, we would all make very different choices.
Some people would go for the supercar. Others who care a lot about the environment might get an electric car. People who like to play in the outdoors might opt for a nice truck.
Is one better than the other?
Of course not.
The car you choose will be the one that fits your lifestyle, personality and priorities.
All of them will get you from point A to point B. But the way you get there will depend on your personal preferences.
…and therein lies the key to success in trading.
Figure out what works best for you.
Great work, let's keep up the momentum! Next, we'll dive into the details of technical analysis…