Forex Analysis - Which Is King - Fundamental Or Technical Analysis?

In forex trading the most simple methods of analysis are known as fundamental and technical analysis. Fundamental analysis is simply the big picture, the examination of a country or nations overall economic state.

Supporters of fundamental analysis, hypothesise that by analysing a variety of economic indicators they can get a view of the economies overall health and thus predict price trends.

The alternate method of analysis, is technical analysis. Rather than looking at the overall picture, the principals behind technical analysis suggests that prices trend or follow certain patterns. Thus by analysing price patterns from the past, it is believed that one can, to some degree, predict future prices.

So which one is actually better?

Neither.

Ideally you should try and combine the two types of analysis if you want to be a profitable forex trader. If you limit your scope to just one form you're going to get caught out.

If you only use one of the techniques, you only see half of the big picture. Here's why:

If you are solely using technical analysis for example, you don't consider any economic indicators, you have your charts, and they won't let you down, will they? Let's take this further:

You dig deep in to your charts, and you soon see a potentially profitable trade on the horizon. Your charts show 3, 4 or even 5 indicators which suggest a huge rise is about to occur in the US dollar. It's going to go crazy. You want to get in early so you dive in, get your trade going and relax, waiting for the price to sky-rocket.

You wait, and you wait. And then something happens. The price falls, not 30, not 40, but 50 pips! You're done for.

In a heated rage, you log straight on to the latest financial news reports, only to find that the latest figures on unemployment levels have just been released. And they are significantly higher than expected.

It gets worse.

A major bank just released that their forecast earnings fell way below projections, and are now predicting slow sales throughout the next quarter.

It's a big kick to your ego. Those two factors just seriously ruined your week. If you had taken the time to utilise just a little bit of fundamental analysis while pouring over those charts you could have changed your strategy and maybe have seen it coming.

So either method of analysis alone is certainly not the solution. Fundamental analysis is a good tool for identifying and locating general price movement trends, but it fails to provide sufficient detail to give you solid entry/exit points. It's all well and good you know the Pound is about to increase in price, but when do you buy, when do you sell?

You can only get reliable indicators of price movements by incorporated both methods of analysis into your trading strategy. Don't make the mistake of only choosing one method.