Here are the main differences between technical analysis and fundamental analysis…
- technical analysis starts with a chart.
- technical analysts take a much shorter time horizon to do their technical analysis using time frames from a week, days, hours and even minutes.
- fundamental analysis starts with a financial statement.
- fundamental analysts take a long relatively long-term approach to analyzing the forex market.
What is a financial statement? In the context of forex fundamental analysis, financial statements (broadly speaking) are such fundamental data like:
- interest rates,
- employment/unemployment rates,
- Gross Domestic Product,
- Trade Balance etc
There’s more to fundamental analysis than those factors listed above. Other factors can include government and political/geopolitical factors which are or can be really hard to quantify by data.
So in forex, when a fundamental analysts get busy analyzing fundamental data, what he is really doing is determining if a country’s economy is getting weaker (less demand for their currency) or getting stronger (more demand for their currency). For example:
- if a fundamental trader wants to trade the Australian dollar, he would look the main factors that drive the Australian Economy.
- let's say that Australia’s unemployment rate last month was 5% and then this month it's at 4% then what do you think is happening?
What do you think? Is the country’s economy in good shape or not? Well the fact that the unemployment rate has decreased from 5% to 4%, is a good indication that:
- a lot more people have entered the workforce,
- which means more businesses are active and are hiring employees
- which means more money in the pocket of the workers,
- which means they spend more on goods and services keeping businesses alive in the country,
- which means the government gets more taxes from individuals as well as businesses.
So what tends to happen is the Australian Dollar Will be a lot stronger than any currency pair that it pairs up with, like AUDUSD.
This is a very basic explanation of how fundamental analysts look at the underlying fundamental data to predict or forecast the movement of price in the future and then trade based on that information. But you see, here’s the thing: fundamental analysts will eventually have to get back to the use of charts to time their trade entries.
On the other hand, technical analysts believe that all that fundamental data is already factored into price by the market forces of supply and demand therefore why bother stressing about analyzing fundamental data when the price on the charts tell you everything?