05.06.2009 Post in World Economy

Plenty of forums about Forex-trading are full of threads where traders try to answer the same question: what is better? Fundamental or technical analysis?

In my opinion the answer to this question even does not exist. In many respects it is because the question as itself does not contain a correct comparison of two equivalent issues. That is why I would like to take up both types of analysis separately. Of course I will not be able to avoid oblique compares.

Fundamental analysis is based on the information of one kind, and technical one considers another data. There are also differences in fields of application of each analysis’s types. Fundamental research is made during a long-term period, and technical analysis – short-term.

It is not a secret, that fundamental factors are crucial macroeconomic indicators of the national economy state. These indicators influence on participants of exchange market and on currencies’ rates. Looking it another way, fundamental analysis studies all the economical indices, which affect the price of an investment object of in distinction with the technical analysis of trend patterns on graphics. However, not each adherent of fundamental analysis remember, that it is necessary to note one and all the economical indicators. Basic among them are:

– Interest rates

– Money supply

– Unemployment

– Non farm Payrolls

– Gross National Product

– Gross Domestic Product

– Consumer Price Index

– Producer Price Index

– Trade Balance

– Jobless Claims

– Industrial Production

– Capacity Utilization


– Personal Income

– Car Sales

– Retail Sales

– Durable Goods Orders

– Consumer Confidence

– New Home Sales

– Construction Spending

– Factory Orders

– Business Inventories

It is necessary to understand that to interpret economic indexes is not an easy job. The person should have good economic education, analytical mind in order to make qualified conclusions on the basis of fundamental analysis. Interpretation of indexes by newbies in the way like “the level of industrial production in USA increases that is why US dollar rate rises” has nothing in common with qualified analysis and forecast. Only professional analytics who read regularly records and press-releases, communicate with people from trading and investing fields are able to examine all indexes in complex. However, do not give your attempts to master fundamental analysis up for lost. Even basic fundamental analysis based on small experience and common knowledge in economic may help to “catch” trend, sometimes even long-term one. Unlike fundamental analysis, technical analysis studies predictable events inside of trading process with the help of trend indicators which are seen among lines at chat. Trend models and figures of technical analysis are formed from these lines. It is possible to forecast prices movement at chats with the help of trends method.

Adherents of the technical analysis hold by an opinion that fundamental analysis has already taken into account by the market and included to the price. That is why price chat studying is enough for technical analysis forecast. In other words technical analysis is a part of fundamental analysis.

In spite of some simplifying of the real situation – time shift from the moment of information receipt to the moment of its influence on a price is not taken into consideration – this is difficult to question. Technical analysis is a short-term analysis and price always moves in one direction. Three types of trends are distinguished:

“Bullish” trend – prices move up. The definition “bullish” was arisen in a similar way to a metaphor “a bull which raises a price on his horns”. This is situation on price chat when assets’ prices take support level as starting point and set new price maximum. Support and resistance lines are directed up.

“Bearish” trend – prices move down. In this case, a bear crushes a price down falling on it by its body. The situation is reversed to the previous one, prices go to the resistance level, push themselves away from it every time set new minimum, so trend will be directed down.

Sideways trend – there is no definite movement of the price. In this situation the prices are “closed” in some range and go from the line of resistance to the support line and back without new maximum or minimum set. Usually such movement is called “flat”, rarer “whipsaw”.

It should be mentioned that long “flat” is an indicator of price storm at the market – strong movement of the price to some direction.

As a rule prices do not move linearly up or down. However, trend line is directed up when we have bullish trend and prices grow quicker than fall. Quite opposite thing happens when we have bearish trend.

Consequently basic laws of trend construction may be deduced:

– “active trend with more possibility will continue when change its direction”, or

–  “trend will move in one and the same direction till becomes weaker”.

However, do not use oscillators during heavy trend because they are designed for short trends, when long-term fall takes place oscillators signal about resell and advise to buy but the fall is far from bottom. That is why it is more reasonable to trade trends and oscillators use during sideways trends.

Technical analysis is based on unchanging laws of physics, economy and psychology in different historical periods. Other words those rules which work in the past work in the present and will work in the future. That is why this statement gives traders, who use technical analysis, basis with a big likelihood ratio forecast future while trading trend.

Summing up, I must say that there is no need to divide fundamental and technical analysis into correct and incorrect, effective and ineffective, useful and useless. Both types of analysis complement one another. Fundamental lets count the perspectives of the movement main direction and technical lets start and finish trading in time.

The article was added by Vladimir Syrov,

InstaForex Chief development manager