I have been meaning to write this article for a while now as I feel it’s very important for traders to understand the difference between Technical Analysis and Fundamental Analysis and also to determine which approach is best suited to your personality and your trading style.
Understanding the difference between the 2 styles of trading is vitally important if you want to be successful in the markets. As I am a day trader the majority of my trading activity is based on understanding the technical aspect of the market on a day by das basis.
I do have a sound understanding of Fundamentals but it does not play an active role in my day trading activities.
What is Technical Analysis?
Most people think Technical Analysis is putting lots of indicators on your chart and waiting for something to happen.
If you want to lose money in the markets then this is the way to go.
Technical Analysis the Rob Taylor way is learning and understanding the technical aspect of the market, by studying the activity of the participants in the market and working out the highest probability outcome of this activity.
Technical Analysis is not waiting for the price to break support or resistance. It is not waiting for the price to retest a trend line. It is not waiting for one moving average to cross another. It is not looking at Elliot waves, Pivot points or Fibonacci levels, or looking for a Gartley pattern to form.
All that rubbish is not Technical analysis. Let me just make it clear for you one more time in case you missed it.
“Technical Analysis is learning and understanding the technical aspect of the market, by studying the activity of the participants in the market, and working out the highest probability outcome of this activity”.
What is Fundamental Analysis?
Most people think that Fundamental Analysis is waiting for the news to come out and trading based on a market consensus.
The correct way to approach Fundamental Analysis is to consider the overall state of the economy and factors that affect it including interest rates, production, earnings, employment, GDP, housing, manufacturing, and management.
Using this data correctly you can determine fair value on a currency price. If the currency price is above its fair value then it should be sold, and if a currency is below its fair value then it should be purchased.
Trading one currency against another using this model can give you an edge in the market.
Which approach should you use?
Well, that really depends on whether you want to day trade, or whether you want to take a longer-term view of the market.
Fundamental Analysis is of no use to you if you are day trading and using stop losses. If you are trading without stops, which is a very dangerous thing to do then having an understanding of Fundamental Analysis will hopefully prevent you from trading a currency counter to its fair value.
I am a day trader so I am heavily involved in understanding the technical aspect of the market and what is most likely to happen on a day by day basis.
All of my teachings are based on understanding the highest probability outcomes of market events on a day by day basis.
So to recap. Day trading requires you to have a sound understanding of Technical Analysis, and Fundamental Analysis is best suited to a longer-term approach.
Thanks for visiting my site and have a great day. 🙂
