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Fundamental vs Technical

Fundamental and Technical Analysis

In forex trading you will have to make your decision based on either Fundamental Analysis or Technical Analysis. You can always pick just one type and stick to it, but it is much recommended to take a bite from both. Mind you that fortune teller probably won't be able to help you here, so your best changes to be a forex winner is to analyze everything thoroughly, stick to your pattern, backup your decisions with fundamental analysis and enjoy trading! The more you know the better, because in practice many traders combine these two analyses to create forex trading strategy. However try not to overload yourself with too many strategies. There are so many approaches available that it can be difficult to decide which way to turn.   

First, let's understand what fundamental analysis is all about. Forex Fundamental Analysis is a study of economic development and political situation of countries that affect the basic supply and demand. It shows and predicts the way politics and economics influence currency market. Obviously if the country economic is strong, you would expect their currency to do well. Fundamental traders seek any type of information to predict a country's next currency move.

So where should you look and who should a trader like you to listen to?

Basically, all the guys who play a big role in politics and economy should do you good. While US indicators influence the market the most, European Union indicators have much less influence power. The tips about inflation and interest rates are given out by central banks and you should definitely listen to their announcements. Who else is in the list? Traders Chairman of the Federal Reserve Bank of USA, along with Secretary of the Treasury, and let's not forget President of the Federal Reserve Bank of San Francisco and many others. Their announcements give trader ideas about currency behavior. As a fundamental trader you should examine which fundamental indicators are to be announced next week. Check the available forecast numbers and try to predict the number yourself. Know in advance what important fundamental indicators are to be announced the following week. Learn the expected number if it is available and try to guess what will happen next. This is a great exercise for the forex newbies.

Now that we know who to tune to, let's examine the major indicators that influence forex market.

Show me the money

Nobody likes low payroll especially if it gets even lower! One of the indicators of weak economy is when the payroll employment goes down and that of course is not a good thing for the currency.

Interest rate

The Federal Reserve is in charge of creating stable financial system. To maintain this stability FR either raises or lowers interest rates according to economic ups and downs of the country.

Trade Balance
Actually some economists consider trade deficit as a good sign of economic strength while others see it as a loss. However, a country with a large trade deficit usually has a weak currency.

GDP (Gross Domestic Product) or GDI (gross domestic income)
Here is a complicated formula of GDP with it's variables:

GDP =consumption + gross investment - government spending + (export - import)

Brrrrr… that's just too complicated, isn't it? Basically we are talking about an indicator of standard living in an economy. The higher GDP is the higher interest rates are and therefore the stronger currency.

Ok. Enough of fundamental analysis for one day. Now let's move on to technical analysis.

The main thing in technical analysis is CHARTS. Just like Nostradamus predictions of the future based on the events in the past, technical trader predicts the price based on historical price movements. If you believe that everything has a specific trend and pattern technical analysis is for you. We often say people don't change… you must have at least one friend that makes the same choices in life over and over again. So think of forex as your friend that repeats the pattern! Technical analysis will help you to identify that pattern, predict the next currency movement and make profitable trades.

Now that you know both forex analysis techniques start thinking how to use them both!!