Technical And Fundamental Analysis: What Is Better?

One of the most important and difficult issues in currency dealing lies in proper analyzing of changing tendencies on the market and in predicting what factors exactly (and in what manner) influence the currency rates.

Two major approaches to analyzing the currency market are known as fundamental and technical. Fundamental approach assesses the situation from political, economic, credit and financial perspectives. Technical approach uses the methods of charts examination and mathematically based analysis. Both approaches to forecasting the market dynamics try to solve one problem: they try to define in what direction the prices should go. But these approaches have chosen different ways for it. Fundamental analysts try to find the reason for market movement, whereas technical analysts are preoccupied with the movement itself. The movement and market dynamics take place - this is important, technical analysis does not take care for the reasons that cause this movement. In the same situation the fundamental analysts will do their best to explain why this movement took place. So, the difference between two approaches is evident: fundamental analysis investigates the reasons for market changes, technical - their consequences.

Specialists in market analysis still have heated debates about what method of analysis is more effective and precise. Forex investigations showed that fundamental analysis is more effective for long-term tendencies (1 year and more); technical analysis is more appropriate for short-term predictions (up to 90 days). Combination of these approaches proved to be effective for the periods from 3 months up to one year.

Fundamental analysis tries to assess the possible influences of various events upon the movements of currency rates. This analysis consists of macroeconomic and strategic evaluations for the situation in a given country where the currency should change. The criteria that can affect the price often include economic indexes of the country, its currency policy, and other fundamental indicators. Fundamental analysts study political news, market expectations, actions of Central Bank, its interventions and try to forecast how all this may influence upon the market.

Fundamental analysis is one of the most difficult, but still very important on currency market. However, performing the fundamental analysis carries more problems that any other type of analysis: the same factors can have various effects upon the market in different situation. Instead of becoming crucial, these factors can easily turn into merely insignificant. To make a good fundamental analysis one should be perfectly aware about interrelations and influences between the given currencies which reflect relations between the countries, about the history of changes in the given currencies, one should be able to define the overall results for economic measures taken, one should be ready to correlate some factors which may seem irrelevant at first sight. Fundamental analysis requires not only the knowledge of its principal rules, but also vast experience of work on currency market.

The majority of small and average players on financial markets resort to technical analysis in their working practice. This approach supposes that all necessary information about the market and its future movements is already given in the current price. Any factor which can influence the price (economic, political or psychological) is already accepted by the market and is included into the price. The initial data for technical analysis is provided by the prices: the highest and the lowest price, closing or opening price within certain period of time and volume of transactions.

Technical approach has more supporters among active market participants. They use similar charts, getting similar results and making similar conclusions. This massive wave of similar opinions influences the price movement and helps in formatting the predicted trend. In this way the predicted trend triggers its realization itself.

Market faces the events which can be explained (or predicted) in accordance with one of the analytical approaches only. For example, when fundamental factors do not have much influence upon the market within certain period of time, only technical approach can help in forecasting the situation. During these periods the movement may coincide with current market trend; the movement may start correctional steps to the current trend, or the movement may concentrate on fluctuations inside the horizontal range of the trend. The trading decisions are taken on the basis on what is shown by trend lines and indicators of technical analysis.

Though the mentioned approaches are different, these methods of analysis can be of complimentary use. Traders resorting to fundamental analysis still have to take notice of some technical features of the market (major support/resistance levels, level of overbuying and overselling). Traders using technical analysis also give much attention to major news (interest rate, important political events, etc.).

When choosing the trading strategy (global directions of trading, asset structure) fundamental factors should predominate. Choosing appropriate tactics for trading (the moment of investment, position size, given asset) implies the usage of technical analysis. Still all traders should bear in mind that to universal technical indicators or mechanical trading system exist: they cannot sustain all possible situations of the market. Only experienced and creative use of all the tools from both approaches can insure stable and successful trading on the market.

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	Technical And Fundamental Analysis: What Is Better?

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