Choosing Your Trading Style

Technical versus fundamental analysis

Fundamentals are the broad grouping of news and information
that reflects the macroeconomic and political fortunes of the
countries whose currencies are traded. Most of the time, when
you hear someone talking about the fundamentals of a currency,
he’s referring to the economic fundamentals. Economic
fundamentals are based on:
 Economic data reports
 Interest rate levels
 Monetary policy
 International trade flows
 International investment flows
The term technicals refers to technical analysis, a form of
market analysis most commonly involving chart analysis,
trend-line analysis, and mathematical studies of price behavior,
such as momentum or moving averages, to mention just a
couple.
We don’t know of too many currency traders who don’t follow
some form of technical analysis in their trading. Even the
stereotypical seat-of-the-pants, trade-your-gut traders are
likely to at least be aware of technical price levels identified
by others. If you’ve been an active trader in other financial
markets, chances are, you’ve engaged in some technical
analysis or at least heard of it.

Technical analysis can provide the guideposts along the route
of the bigger price move, allowing traders to more accurately
predict the direction and scope of future price changes. Most
important, technical analysis is the key to constructing a welldefined
trading strategy. For example, your fundamental analysis,
data expectations, or plain old gut instinct may lead you to
conclude that USD/JPY is going lower. But where exactly do you
get short? Where do you take profit, and where do you cut your
losses? You can use technical analysis to refine trade entry and
exit points, and to decide whether and where to add to positions
or reduce them.
Sometimes forex markets seem to be more driven by fundamental
factors, such as current economic data or comments
from a central bank official. In those times, fundamentals provide
the catalysts for technical breakouts and reversals. At
other times, technical developments seem to be leading the
charge — a break of trend-line support may trigger stop-loss
selling by market longs and bring in model systems that are
selling based on the break of support. Subsequent economic
reports may run counter to the directional breakout, but data
be damned — the support is gone, and the market is selling.

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