Chapter 5 - Introduction to fundamental analysis
Fundamental Analysis Vs. Technical Analysis
Fundamental and technical analysis are the basic methods for traders analysis of economic and market conditions to determine the future trend in financial markets.
While the objective of the fundamental analysis is to focus on the data of news and economic indicators, technical analysis focuses on price charts patterns and the current price movement of the stock or currency to be traded.
Technical analysts also calculate and use a number of other relevant technical indicators to determine the direction of the trend and momentum in exchange rates. These include oscillators, moving averages, volume and open interest indicators in the case of futures, just to name a few.
Technical analysis differs greatly from fundamental analysis, and it may indicate a different prospected direction of the currency pair trend, but the fact remains that technical analysis provides one of the best objective tools available to the trader in the Forex market in order to quickly evaluate the market and generate profits through short-term trading.
However, technical methods have their drawbacks, including the fact that all other traders in the world look into the same exchange rate data. This may result in a herd-like effect when the classic chart pattern begins to evolve, which may exacerbate paid stopping movements when the pattern fails.
Fundamental analysis has traditionally been suitable for traders working on a longer time frame. This method includes analysing the general economic strength of the country, interest rates, the monetary policy of the Central Bank, money supply, trade balances and current accounts, as well as the general political stability of the country.
However, some of the major traders use short-term news trading strategies that generally work after issuing a large economic number or central bank interest rate decision or news of a major geopolitical event, such as war or natural disasters.
Regardless of the analysis methodology that best suits the trader’s trading plan, research and market analysis are still a key component in a successful foreign exchange market “Forex” trade, be it research by fundamental or technical analysis, and most traders find that practical knowledge of the two analysis methods is very useful and may give a more accurate indication of the error rate.
Although research and analysis are a major component of Forex trading, money management aimed at preserving capital can be as or even more important than fundamental and technical analysis methods to a trader's long-term success.