The process of evaluating investment decisions has long divided traders. Some market participants swear by technical analysis, whereas others believe fundamental analysis is the best approach for long-term investment decisions. While it’s perfectly acceptable to have a preference, most traders may benefit from integrating both approaches.
Fundamental analysis involves analyzing an asset’s intrinsic value by looking at all aspects of a business or market. In the forex world, fundamental analysis is the process of evaluating all aspects of a currency pair to arrive at its true value.
For example, if you’re trading the EUR/USD, a fundamental approach would look at all the market-based factors impacting this pair. This includes following and responding to economic data, monetary policy and other news pertaining to the Eurozone and U.S. economies.
Technical analysis differs markedly from fundamental analysis by focusing on the supply and demand in the market to determine where the price trend is heading. Technical analysis is the process of utilizing past market information, such as price and volume, to determine where an asset will end up in the future.
As one might expect, technical evaluation methods rely heavily on charts and graphs to plot out past prices and the future trajectory. Using the EUR/USD example above, a technical chart can tell you if the pair is likely headed higher or lower in the short term. It does this by evaluating things like support and resistance, bullish or bearish trends and overbought/oversold conditions.
Using Both Approaches for Optimal Success
Forex traders should know that technical analysis drives the strong majority of market movements, but that alone shouldn’t be enough to disqualify fundamental analysis. By looking at the fundamentals, traders have a better sense of where the market is headed in the long term. After all, knowing that an economy is headed for recession or that a central bank is gradually raising interest rates can have a direct impact on your investment decisions.
Whereas fundamental analysis gives you a long-term perspective, technical analysis gives you the tools to respond to short-term changes in the market. When used in tandem, technical and fundamental analysis pack a powerful one-two punch for evaluating assets.
It’s important to note that fundamental analysis and technical analysis often conflict. In this scenario, it’s up to the trader to determine their next course of action. This will ultimately depend on your trading horizon (e.g. short-term or long-term), and whether you are prepared to remain invested in a position for any length of time.