One of the most basic and earliest questions encountered by a student of forex trading online is the choice of a school of analysis. Technical and fundamental analysis are two approaches that have their proponents among some of the most successful names in the history of trading. Names like Jim Rogers and George Soros are made part of each household due to their great profitability through the use of fundamental analysis. On the other hand, great traders like Alexander Elder and Martin Schwartz proudly trumpet their great achievements in technical analysis, not to mention the creator of the Williams Oscillator, who was a legend among traders even at a young age. As it is obvious, both sides have strong proponents, and both schools can boast great names with great exploits to back their claims. But which one is the best for you, and if you’ll combine them, how should you do so?
First of all, let’s remember that success in forex is as dependent on good risk management as it is on good analytical skills. In most cases, trends in the market are generated by the perceptions of market participants. As such, they are unlikely to have a one-to-one correspondence with economic realities, and even when the reasons backing a particular trend are strong, there’s always the possibility that it will develop into a bubble where all connection with reality is easily and rapidly lost. As such, the credibility of both technical and fundamental analysis is limited by the rationality of market participants. A successful trader always prepares for being proven wrong by the markets, and never blames the market, or even his analysis, when things don’t go as expected.
It is fair to say that the causes of market events can be determined in the long term through the use of fundamental analysis. This is true even if the market is not reacting in a rational manner, because a seemingly irrational condition is still being maintained because some people somewhere are making great profits from it (from their vantage point, there is nothing irrational in the way things are going.). On the other hand, in the short–term the price action is more or less unpredictable, and difficult to analyze, and it is perhaps a good idea to use technical tools in the analysis of short-term trends due to the meaninglessness of fundamental factors on a five-minute basis, for example.
A trader can choose to employ any of these methods and achieve varying degrees of profitability provided that he’s also applying risk management methods carefully. All schools of analysis will emit false signals once a while, that is the one infallible rule of analysis. Even such great minds like Warren Buffer are well-known to have made some major mistakes in the past, and nobody blames them for incompetence on that basis. But when these people make mistakes, they don’t vacillate, but act quickly and decisively to correct the error and take the necessary actions to ensure future profitability.
Finally, depending on your preference in analysis, make sure that you choose only those forex brokers that are suitable to your expectations. Some brokers perform better with a technical strategy, others are more suited to a fundamental approach. In both cases, try to test the broker thoroughly through several stages before making a real commitment.