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Thread: Fundamental Analysis vs Technical Analysis

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    Default Fundamental Analysis vs Technical Analysis

    Fundamental Analysis vs Technical Analysis

    1. The Debate Continues

    One of the dominant debates in financial market analysis is the relative validity of the two major tiers of analysis: Fundamental and technical. In Forex, several studies concluded that fundamental analysis was more effective in predicting trends for the long-term (longer than one year), while technical analysis was more appropriate for shorter time horizons (0-90 days). Combining both approaches was suggested to be best suited for periods between 3 months and one year.
    Nonetheless, further empirical evidence reveals that technical analysis of long-term trends helps identify longer-term technical "waves", and that fundamental factors do trigger short-term developments.

    Lets take the declining USD/JPY exchange rate in 1999 as an example. The pair lost 16% in the second half of the year, reaching a year low of 101.90. Both fundamentals and technicals alike could explain the downward move. Fundamentals attributed it to the continuous capital inflows into Japanese assets, which reflect investors increased optimism with the Japanese recovery. Technical analysts were likely to explain the move with the simple argument: the language of the market voiced a clearly downward tone that became more resounding after the breach of key technical landmarks (115 yen and 110 yen).

    Thus, both technicals and fundamentals reached the same conclusion. Yet the devil is in the details. Fundamental analysts with a technical blind spot risk missing key market turnarounds after the breach of an important support/resistance level.

    Conversely, a technically inclined analyst with a disregard for fundamentals and news releases would have missed the rebound in EUR/USD which was triggered by the release of a stronger than expected German business sentiment survey (IFO) in July 19, 1999. Up to that point, the euro had lost 15% reaching an all time low of $1.010. Most market observers-fundamentals and technicals were predicting the euro to break below $1.00. Technical analysts stated psychology, momentum and moving averages as arguments for further downfall. But fundamentally inclined analysts who paid attention to the strong survey would have been able to promptly exit their long dollar positions in favor of the euro. On that day, the euro jumped 200 points against the dollar with an additional 260 points on the following day, and an extra 150 days in the third day. In just two weeks, EUR/USD soared by more than 800 pts.

    Obviously, the IFO survey release was not the single reason behind the euros 7% rebound. Other factors over the subsequent weeks also helped prop the currency. These included a broadening improvement in economic fundamentals throughout the Eurozone and increasingly hawkish stance (favoring higher interest rates) from the European Central Bank. Nevertheless, the release of the IFO survey was the turning point in shifting expectations of the euro.

    It has been often stated that combining fundamentals with technicals was counterproductive. Owing to their contrasting types, technical and fundamental analysis are often said to be mutually exclusive. Yet, a large number of traders combine the two approaches, even instinctively. Thus, technically inclined traders do pay attention to central bank meetings, give consideration to employment reports and heed the latest inflation numbers. Similarly, fundamental traders are often trying to figure out the major and minor levels of support, and determine the percentage of retracement formations.

    There does not exist a specific formula for figuring out the optimum approach of combining fundamental and technical analysis in the Forex market. Some computer software packages claim to be able to make such decisions, weighing one approach against another depending on economic, technical and quantitative parameters. Yet, these are based on models from past patterns of inter-market dynamics and previous technical and fundamental behavior. The FX market is too dynamic for such pre-formed frameworks.

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    2. Expectations and Sentiment
    Fundamental and technical factors are undeniably essential in determining foreign exchange dynamics. There are, however, two additional factors that are paramount to understanding short-term movements in the market. These are expectations and sentiment. They may sound similar, but remain distinct.
    Expectations are formed ahead of the release of economic statistics and financial data. Solely paying attention to the figures released does not suffice in grasping the future course of a currency. If, for example, US GDP came out at 7.0% from 5% in the previous quarter, then the dollar may not necessarily move as you would expect it to. If market forecasts had expected an 8% growth, then the 7.0% reading might come as a disappointment, thus causing a very different market reaction from the one you were expecting had you not been aware of the forecast.

    Nonetheless, expectations could be superceded by market sentiment. This is the prevailing market attitude vis-à-vis an exchange rate; which could be a result of the overall economic assessment towards the country in question, general market emphasis, or other exogenous factors. Using the above example on US GDP; even if the resulting figure of 7.0% undershot forecasts by a full percentage point, markets may show no reaction. A possible reason is that sentiment could be dollar positive regardless of the actual and forecasted figures. This might be due to solid US asset markets, or poor fundamentals in the counter currency (euro, yen or sterling).

    A term that is commonly interchanged with "sentiment" is "psychology". During the first two months of 2000, the euro underwent fierce selling pressure against the dollar despite persistently improving fundamentals in the Eurozone. That is because market psychology had decidedly favored US dollar assets due to continuous signs of non-inflationary growth, and sentiment that further increases in US interest rates will work in the advantage of US yield differentials, without derailing the economic expansion.

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    the SUCCEED trader GATHER between Fundamental Analysis AND Technical Analysis

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    What's important is to obey what the Technicals tell you, THEN bring the fundamentals into the equation.
    When a news release is imminent, I'm usually already in the market. All I do is tighten stops and wait for the fireworks to be over.
    Jafar Calley - Director
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    to succeed u muast combine between Fundamental Analysis +Technical Analysis

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    i always use fundamental trading (news trading) for entry, but often use technical analysis to determine target and stop loss.

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    Fundamental is your father.
    Technical is your mother.

    Description:
    Mostly father in nature. Only react and see the perspective using overall method (briefly, big aspect). Just like the CEO, CFO, etc. They are looking at the whole tree. In nature, he will decide the family boat will be heading where, and along by the help of his wife.
    Father is the one who built the house for family.

    Mother. This one is your very close blood-line. You were born from her. She is the one who breed you mostly using her blood's milk. Her nature is good at looking small aspects. And she is good at handling them. She is very eye-trained on them. And yet she is doing the root, the leaves, the branch, and rest of small details of the tree.
    Mother is the one who gave the aura to the family in the house that had been built by father.
    Last edited by aowaow; 07-09-2007 at 06:16 AM.

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    wow aowaow good explanation right there.. i will try my best to understand fundamental analysis.. .i really dont know how to use it..thanks so much for this input..

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    father mother corelation ok but father is not temporary nature fundamentals drive the market for the short term and technical drive along with market for long term

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    I tend to use technical analysis, and then double check the results with Fundamental analysis. but I more rely on technical part though.

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    Default a point of view

    Fundamental analisis is more appropiated for traders that managed bigs accounts and can handle a position for many pips. Technical analysis is more easy to understand for small fishesand we can not handle a position for many pips because our balances are very smalls.sm_smile
    Salut!

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    Quote Originally Posted by la totona View Post
    Fundamental analisis is more appropiated for traders that managed bigs accounts and can handle a position for many pips. Technical analysis is more easy to understand for small fishesand we can not handle a position for many pips because our balances are very smalls.sm_smile
    Salut!
    Yes, I agree with you up to certain extend, but look my friend, if your position is winning, and the trend is up, what is stopping you from holding onto that trade? it does not cost you any extra to keep position open for longer time (as long as it's in your favor and the swap is positive).

    So not only "bigshots" can hold positions for a long time, but "regular shots" can do too, that's what I think.

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    To me, one has to consider both, as supply and demand dictate the market.
    ..and in turn interest rates primarily dictate the fundamental demand...so one has to look at what drives interest rates higher or lower. this is obviously over simplified
    but for little guys like me who are only in a trade for max a few days...tech is my main focus but i am always aware of the fundamental environment....and any news announcements that might effect my trade.
    people feel free to add or disagree...may u all reep lotsa pips

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    I think this needs a very good finance background but I will try to understand the difference.

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    i think that the technical analysis reflect the senteiment of the trader for the news, so im think the technical analysis is better.

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