FOREX TRADING ANALYSIS: FUNDAMENTAL ANALYSIS VERSUS TECHNICAL ANALYSIS

FOREX TRADING ANALYSIS: FUNDAMENTAL ANALYSIS VERSUS TECHNICAL ANALYSIS

 The approach to obtain all the factors affecting the outcome and their aftermath prior deciding future events and actions is often considered as conventional. This attempt of studying factors affecting the performance or price in the market is referred as Fundamental analysis. Fundamental analysis for Forex market studies the economic factors, politico-legal conditions of one nation’s currency vis-à-vis another currency. Today traders, with high risk appetite and impetus to rake in a short span, concentrate more on technical analysis i.e. considering the historic price movement and performance of the currency.

Traders focussing more on technical analysis than the fundamental analysis, to evade long time horizon and complex study of economic indicators and statistics. But in order to get more relevant view of the market performance and future currency trends it is indispensable to consider fundamental analysis.

Practically, traders use these two techniques in conjunction to determine trading strategies.

FUNDAMENTAL ANALYSIS

In forex industry, Fundamental analysis studies the economic indicators that have an impact on the performance of the currency pair (a nation’s currency denominated in terms of another nation’s currency. It considers indicators such as supply and demand in the market, growth trend, gross domestic product, interest rate, employment conditions, political stability, legislation system, productivity and foreign exchange policy and regulations for forecasting the future price movements of the currency pair.

Fundamental analysis deals with identification of variables that will determine the intrinsic value as it takes into account the factors that elaborate the real worth of the currency. It identifies the health of the nation and is a significant indication of the economic well-being.  A fundamental forex trader analyses the nation’s benchmark interest rates, trade balance, inflation, growth rates and employment situations. It therefore signals trader whether to trade to the future movement of the currency.

The value of currency can be affected when the demand or supply of that currency is changed due to efficient market operations or through policy implication by central bank. Currency is more valuable when amount of currency available in the world market is reduced (increase in interest rates causing a reduction in spending), or when there is an increased demand for that particular currency. it is also affected by the political stability in the country, the more volatile a country’s political environment is the more volatile will be the currency. 

To do fundamental analysis for a currency pair, it is better to get an overview of both the currencies.  To determine a fundamental breakdown of a currency pair is to gather all relevant information on both currencies.

Trade balance of a nation is considered to be imperative while trading in forex market.  A trade balance showing a deficit (more imports than exports) is a negative indication.  Deficits lead to devaluation of the currency since it signifies the money flowing out of the country to satiate the demand for foreign made goods.  Trade deficits generally affect a currency when they are reported higher than the market consensus.

One of the vital factors to consider while taking decisions is interest rate. Interest rates may have either strengthening or weakening effect on the currency. When the increase in interest rates tend to increase in supply because of the sale of investors’ holdings (they expect higher borrowing rates may affect prices adversely) the stocks will be affected negatively. On the contrary high interest rates will entice foreign investments, which strengthen the local currency.

TECHNICAL ANALYSIS

Technical analysis is a technique of predicting price movements and future market trends by studying historic market charts based on price of the currency, volume of trading.

Technical Analysis focuses on study of timing, traders sentiments and price fluctuations. It is usually done by studying historic charts and considering volume of trading over that span. Technical analysis does not require elaborated study of economic data or statistics but is easily done through predicting by merely considering past performance.

Technical analysts do not determine the intrinsic value but predict market sentiment and currency price movement. They believe that market is predictable and history repeats its trend, thus on the basis of the previous charts, data, and records currency future performance is predicted.

There are various tools to take in to account which for efficient technical analysis viz. charts, trend, trendlines, divergence and convergence, support and resistance, indicators, retracements, pivot levels, Fibonacci.

Traders with lesser risk appetite want more penetrating approach while trading with their money, thus devote time to fundamental analysis while traders who want short term gains and are less risk averse concentrate on technical techniques.

Present scenario suggests that traders have been adopting a combination of both technical and fundamental techniques.