Each type of analysis has its critics and advocates, and many traders strongly favour one type over the others. However, unless you have been trading for a long time and have developed strategies that are proven to work for you, it is unwise to form such a one-sided opinion at such an early stage. No type of analysis is better than another – they are just different ways of looking at the market.
Ultimately, you should base your trades on the type of analysis that you are most comfortable with, and that you have the best track record of success with. Some traders might make a killing just by looking at the fundamentals, whereas others might be hugely successful with a strategy purely based on technical analysis. Only by learning about the various analysis types and experimenting with them can you decide which is the best for you. Most successful traders take all three into account when making trading judgements.
In order to demonstrate why it can pay to take a more holistic view of the various types of analysis, here is a hypothetical situation. Let’s say that you are looking at the charts and you find what seems to be a perfect EUR/USD trading opportunity. You then proceed to invest a sizeable chunk of your trading account in buying EUR/USD in the confident expectation of a healthy profit.
Then, the trade moves 150 pips in the opposite direction to what you anticipated, due to the bankruptcy of a major European bank, and the corresponding negative market sentiment that usually accompanies such events. You have now lost a huge chunk of money, and depending on how much you leveraged the trade, you may even owe your broker money.
How did this happen? Well, because you were only looking at the technical analysis charts, you ignored the fundamentals and the sentiment of the market. You didn’t expect the bank to go under, because you were too busy looking at the charts to read the news feeds. If you had paid closer attention to these things, you might not have made such a costly error. So, you can see why it is worth paying attention to all three types of analysis, especially when making larger trades.
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