Fundamental Analysis and Technical Analysis

Before we delve too deeply into the particulars of fundamental analysis, we should mention that fundamental analysis is not meant to replace technical analysis, or vice versa. In other words, traders should not employ either the one or the other but, rather, a combination of both schools of thought to inform their trading style. It may be the case that you find yourself focusing more on one of the two at certain times but both fundamental and technical analysis are indispensable to trading.

To understand this better, let’s consider the following scenario: You trade according to technical analysis only. You study the historical performance of a currency on a chart, detect chart patterns and use technical indicators and oscillators to enhance your trading strategy. Now, let’s say that the currency you are most interested in is the U.S. dollar. No matter how good you are with chart patterns and determining trends, your analysis of the movements of the U.S. dollar would most likely crumble if a major event such as a natural disaster or a political election took place. The same applies for opposite situations, where traders focus only on fundamental analysis and pay no attention to how a currency has performed in the past.

Ideally, then, you should try to keep up with any major geopolitical and/or social events that currently have an impact on, or are likely to influence, the economy of a country, while also paying attention to a currency’s historical price movements to see how it has reacted to similar events in the past.

Did you know?

If overwhelmed by pessimism and falling prices, the FX market is defined as “bearish”, while if characterised by optimism and rising prices, it is called “bullish”. These two terms derive from the way in which bears and bulls attack their opponents, with the former swiping its paws downwards and the latter thrusting its horns upwards.

Word of the day
"Swing Trader" - A currency trader who places short-term trades in order to benefit from short-lived trends.
Pro Tip

Most market activity occurs when at least two market centres are open at the same time.