Why You Need to Blend Fundamental and Technical Analysis
Everyone has their own unique trading style, and this is why some people are more successful than others in the trading world. Many newbie online traders and those who are still finding their way in the markets choose an approach that involves either fundamental analysis or technical analysis. This assumes that one of these methods can be used as a direct substitute for the other. Sadly, in the world of forex, this isn’t the case and, to be successful, you need a blend of both strategies, as this will make your strategy all encompassing. Here are 3 reasons why blending the two approaches provides you with the best option…
1) It Will Help You Know What Other Investors Are Thinking
Knowing what other investors are thinking gives you a key insight into the way that the markets are moving. If you know what others are thinking, then it is likely that you’ll have access to more information than you would have on your own. Of course, you can gain your own insight into market movements in a number of ways. The best way of doing this is to look at recently traded volume. A sudden change in trading volume will immediately show you that other traders either agree or disagree with the position that you are taking; especially if you’re previously seen that something is gaining momentum.
2) Tracking Short Term Trends
Anyone who trades purely using fundamental analysis is known as a ‘long haul trader’ because they map long term trends in market movements, searching for when the best exit price is likely over a lengthy period of time. Having said that, this can also be achieved easily using technical analysis by examining moving averages.
These can be done over differing periods of time, but the 15-21 day moving average is generally perceived to be the best for judging breakouts. Both technical and fundamental analysts can use this chart to suggest and track breakout patterns, but the moving average must be watched closely, because once it breaks free, it usually continues along that trend, displaying its tendencies for the next average.
3) Repeating History
As the famous saying goes, history will always repeat itself. Short term trends are relatively easy to track using fundamental analysis, but, if you’re looking for historical reoccurrences, then you’ll need the charts from charting software like ecn MT4. If you’re able to look back at history then you stand a much better chance of knowing which way the market will move after a short term announcement.
Of course, this is not an exact science, but it can help you massively as long as you’re aware that there’s scope for markets to react differently. Take these findings with a pinch of salt, using them as a ballpark figure of how the markets will react to specific recurring news such as annual economic announcements.
So there we have it, three reasons why you need to blend fundamental and technical analysis in your trading strategy.