Technical analysis vs. Fundamental analysis

Technical
analysis is often opposed to fundamental analysis as if the two have to be used
separately. The reality is that they should
be used together.

Fundamental
analysis gives a trader trading ideas and direction, but technical analysis can help in structuring those trading ideas and manage risk better.

HOW TECHNICAL ANALYSIS HELPS

Let’s say
you are bearish an FX pair because of strong monetary policy divergence.
Technical analysis can help you with timing. For example, entering on a pullback
into a strong support or buying a breakout.

If you see
that the pair rallied already its entire average daily range, then there’s very
little chance it can go even further that day without a serious fundamental
catalyst. In this case, you can avoid entering at the highs and suffering a
price pullback against you.

Another
help can come from marking strong support and resistance levels. For example,
if you see that the price pulled back into a strong support, you can decide to
buy from that level placing a stop loss below it and limiting your risk in case
the price breaks and continues to fall.

You can
also use technical analysis for profit targets. Let’s say you are in a trade
that is going well, and you see that the price has reached a strong resistance.
If you think that the fundamentals do not support such a breakout, then you can
take profit around that level without risking giving it all back in case the
price reverses. Alternatively, since we never know what can really happen next,
you can take some profit off the table and let the rest run.

Last but
not least, technical analysis can make you learn about historic price movements
and what caused them, giving you an advantage when similar events occur again.

SUMMARY

To sum up,
technical analysis does not give you a trading idea or direction because it’s
just a risk management tool, but it can help you in many ways if used correctly.

This article was written by Giuseppe Dellamotta at www.forexlive.com.