Fundamental vs Technical Analysis

By: James Gous

The Foreign Exchange market has experienced enormous popularity in the past few years, thanks to technology and the flexibility offered by the genre for the average retail forex trader. You can trade anytime and from anywhere, but success still depends on knowledge, experience and emotional control. These are factors that impatient newcomers to the forex market are loath to admit before they crash and burn. Yes, casualty rates are high due to high risks, and specialized training is a must have from the start.


For stock traders that wish to try their hand in this “greener pasture”, minor adjustments are necessary before committing real capital in the forex market. A trader’s “best friends” continue to be fundamental and technical analysis.

Fundamental Analysis

Trading on Fundamental Analysis means understanding that the underlying data is NOT important — what is important is the market’s reaction to that data. Remember that most fundamental data is ‘projected’ – the actual release of fundamental news only acts to confirm or change those projections. Thus the ‘timing’ of fundamental analysis is of greater importance and leads to shorter term profits or loss due to the swing in market reaction.

Stock traders are usually deep in fundamental analysis skills; comparing financial statements, selected sector performance and business cycle impacts. In the world of Foreign Exchange, the fundamentals are not so “isolated”...

Nearly anything and everything can make the markets move, some things more dramatically, but sensitivity to events is definitely moved up a notch.
Currencies come in pairs and do not have “intrinsic” value.
Traders invest in a “position” that has “relative” value, depending on the nature of the economic health or the currencies respective countries.
Every position equates to a “long” in one and a “short” in the other.
Bankruptcy is not a concern, especially for the major pairs connected with the Dollar, but cyclical waves occur more frequently.
Experienced traders soon recognize that they cannot compete on a fundamental data interpretation basis with large global banks and hedge funds that devote considerable resources to this activity. One needs awareness of key data release calendars to prevent being blindsided by a sudden disruption in the market, and understand how major fundamentals will impact the market. The objective then becomes to join a potential trend and ride it for all it is worth; accepting that if the market reverses, then you act quickly to minimize the damage.

Technical Analysis

Trading on Technical Analysis gives you maneuverability in the markets. Technical Analysis is designed to reflect fundamental analysis in the current market price — in other words; the market is doing the fundamental work for you. What you are doing is riding a trend based on the trend meeting certain criteria.

Technical tools are of much greater importance in this market since both volatility and sudden directional changes create quite a chaotic trading environment.

Traders focus on a few favourite indicators and continually review a variety of timeframe snapshots to validate the certainty of a forceful trend, either up or down.
Fibonacci retracement ratios become consistent signifiers of support and resistance.
Searching for high probability setups is facilitated by technical analysis as the only way to optimize both entries and exits in a very fickle market.
Understanding trader psychology also helps when trading in the forex market.
Pricing movements in the forex market, however, do replicate wavelike patterns and often suggest a tendency that can be anticipated with experience. Technical indicators and pattern recognition skills do easily transfer from other trading mediums, but a quicker and defter touch is the distinguishing characteristic. The action is very quick, and you can easily miss a major market move in the blink of an eye.

The Need for a Disciplined Approach.

Due to the intensity of the currency markets, a successful trader must have a step-by-step trading plan that governs his/her every move before, during, and after a position is closed. The plan must incorporate both fundamental and technical analysis. Lastly, invest the time necessary in practising on a “free” demo system that trades virtual cash with real time quotes. Fine-tuning your trading plan will pay dividends later when real capital is on the line.

Sources:

POULOS, B Forex Trading: Fundamental versus Technical Analysis 13 June 2009 [O] Available from: http://www.ino.com/blog/2009/06/forex-trading-fundamental-versus-technical-analysis/ [Accessed 15 April 2012]

CLEVELAND, T Fundamental vs. Technical Analysis in Forex [sa] [O] Available from: http://www.forextradingzone.org/articles-Fundamental_vs_Technical_Analysis_in_Forex [Accessed 15 April 2012]