Fundamental Analysis vs Technical Analysis

When it comes to analyzing the forex market, there
are two basic schools of thought. One is called
fundamental analysis, which is the study of a
nation's overall economy. Proponents of this
big-picture view believe that price trends can be
predicted by analyzing various economic indicators
which give an overall picture of an economy's
health.

The other school of thought is called technical
analysis. The core belief behind technical analysis
is that prices tend to follow patterns, and that by
analyzing past price patterns one can predict what
the price will be in the future.

But which type is better?

Well, to be honest neither. You need to combine both
types of analysis to become a successful trader.
Limiting yourself to only one or the other is a recipe
for disaster.

Why? Because by using only one method you're only
looking at half of the picture. Let me use an example
to make my point.

Let's say you're a strict technical analyst and you have
no use for fundamental analysis. "What do I need to look
at economic indicators for," you say. "I have my price
charts and they shall never let me down!"

As you study your charts, you begin to see an opportunity
forming. You've got 3 or 4 indicators showing that a huge
breakout is about to occur. The US dollar is about to go
on a rampage and rush to get in early. So you make the
trade, sit back, put your feet, and wait for the price
to soar.

But then something funny happens. The price drops 50 pips!

What the heck happened??

In disgust, you walk away from your computer and flip on the
television just in time to see the financial report. It turns
out that the latest Unemployment numbers were just released
and the number is much higher than expected. At the same time,
one of the world's largest corporations announced that their
earnings were well under forecasted amounts, and they predicted
sales would continue to be sluggish through the next quarter.

Those two variables through a major monkey wrench in the price
rally you predicted. If only you had mixed a little fundamental
analysis in with all of those price charts you were busy
studying you may have seen this one coming.

Of course, using fundamental analysis alone is not the solution.
The big-picture view of fundamental analysis is great at
identifying general trends in price movement, but it does
not give a detailed enough look to provide entry and exit
points. Sure you may know that the Swiss franc is due for
a price increase, but how much? When should you buy and then
when should you sell?

Only by incorporating both methods into your trading system
do you have a chance to be a successful trader.