Fundamental Analysis versus Technical Analysis
December 30, 2008 by admin
Filed under Forex Fundamentals
Fundamental analysis and technical analysis are two ways of analyzing the Forex market. Think of them as two tools rather than one versus the other. Technical analysis is really chart analysis. Basically, technical analysis uses mathematics to look at a trading pattern and determine where the chart is going. Technical analysis uses past trends from historical data to formulate patterns of non-random events. If X and Y occur, then the currency pair will probably move up. While this is not always the case, if it has been proven to behave this way consistently in the past, then chances are good that it will perform likewise in the future.
Fundamental analysis doesn’t rely on chart reading as much, but instead studies fundamentals. Fundamentals for Forex would be things such as interest rates, economic growth, unemployment, exports and imports, debt and deficits, overseas remittances, political stability and so on. Fundamentals take into account such factors with the goal of determining the probable value of a currency in the future. For example, if Europe’s economy is grown much faster than the United States, then the EUR/USD will probably increase. If the United States is increasing its debt and Japan is taking measures to pay off any debt, then there is a chance that the USD/JPY will fall. Keep in mind that there are many factors, so you have to study all of the fundamentals before you can guess what is going to happen. The other consideration is that many times some of these fundamentals are already factored into the price. If people see, say Australia’s economy growing rapidly, then there is a good chance that the AUS/USD will already reflect some of that future growth.
Whether a trader uses technical or fundamental analysis will determine the timelines for trades. Technical analysis can happen quickly in a matter of minutes or over the course of a few days or weeks. Fundamental analysis usually takes weeks, months, or years to have results.
If you want to succeed at Forex trading, the best route is to use both technical and fundamental analysis. If you are going to make a table would you only use a hammer or a saw? No, you would use both to make the best table. Think of these as two tools that you can use to be successful in your Forex trading.
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