Technical versus fundamental analysis

Ask yourself on what basis you’ll make your trading
decisions — fundamental analysis or technical analysis?
Fundamentals are the broad grouping of news and information
that reflects the macroeconomic and political fortunes of the
countries whose currencies are traded. Most of the time, when
you hear someone talking about the fundamentals of a cur-
rency, he’s referring to the economic fundamentals. Economic
fundamentals are based on:
Economic data reports
Interest rate levels
Monetary policy
International trade flows
International investment flows
The term technicals refers to technical analysis, a form of
market analysis most commonly involving chart analysis,
trend-line analysis, and mathematical studies of price behav-
ior, such as momentum or moving averages, to mention just a
couple.
We don’t know of too many currency traders who don’t follow
some form of technical analysis in their trading. Even the
stereotypical seat-of-the-pants, trade-your-gut traders are
likely to at least be aware of technical price levels identified
by others. If you’ve been an active trader in other financial
markets, chances are, you’ve engaged in some technical
analysis or at least heard of it.
Followers of each discipline have always debated which
approach works better. Rather than take sides, we suggest fol-
lowing an approach that blends the two disciplines. In our
experience, macroeconomic factors such as interest rates,
relative growth rates, and market sentiment determine the
big-picture direction of currency rates. But currencies rarely
move in a straight line, which means there are plenty of short-
term price fluctuations to take advantage of — and some of
them can be substantial.

Technical analysis can provide the guideposts along the route
of the bigger price move, allowing traders to more accurately
predict the direction and scope of future price changes. Most
important, technical analysis is the key to constructing a well-
defined trading strategy. For example, your fundamental analy-
sis, data expectations, or plain old gut instinct may lead you to
conclude that USD/JPY is going lower. But where exactly do you
get short? Where do you take profit, and where do you cut your
losses? You can use technical analysis to refine trade entry and
exit points, and to decide whether and where to add to posi-
tions or reduce them.
Sometimes forex markets seem to be more driven by funda-
mental factors, such as current economic data or comments
from a central bank official. In those times, fundamentals pro-
vide the catalysts for technical breakouts and reversals. At
other times, technical developments seem to be leading the
charge — a break of trend-line support may trigger stop-loss
selling by market longs and bring in model systems that are
selling based on the break of support. Subsequent economic
reports may run counter to the directional breakout, but data
be damned — the support is gone, and the market is selling.
Approaching the market with a blend of fundamental and
technical analysis improves your chances of both spotting
trade opportunities and managing your trades more effec-
tively. You’ll also be better prepared to handle markets that
are alternately reacting to fundamental and technical develop-
ments or some combination of the two.