Fundamental Vs. Technical Analysis

Evidently, both fundamental and technical analysis are important for trading. But when talking to experienced, successful traders, there is often no agreement on which is more important. Nor is there a consensus on how much emphasis a new trader should put on each.

Some traders will say they trade entirely technically, and only look at fundamental analysis for background. Others will largely ignore technicals and focus primarily on fundamentals.

Who’s right? Well, a lot of that, of course, has to do with style. Since beginner traders are not often sure what style they should pursue, or what will suit them best, it can be confusing. However, there are general observations that can help both budding and long term traders understand why some focus more on fundamentals and others on technicals.

It’s About The Basics

What drives forex is fluctuations in the prices of currencies relative to each other and that means changes in their value. Currencies change value over time primarily due to underlying economic, political and social factors.

That’s what we call fundamental analysis. If a currency’s fundamental value changes because of a change in tax policy, economic situation, trade agreement, etc. then the currency pairs it is part of, will ultimately change.

On the other hand, demand for the currency also changes its value in relation to others. If people buy or sell a lot of the currency, it will change price. These moves cause all those peaks and valleys in the currency charts and frequently are not related to fundamental issues. Of course, fundamental changes drive demand. However, small fluctuations in the currency value are often the product of who is coming to the market, and who is leaving.

The Fundamental Process

Fundamental changes in the value of a currency are often relatively significant and take a long time. The process of a country going into recession, for example, usually takes a few months. And, if it’s the only currency in that condition, it can cause considerable changes in the value of the currency.

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