Fundamental analysis gives priority to the economic and political environment driving an assets price. Within foreign exchange, factors such as interest rate decisions and inflation are some of the key forces to consider while commodity market fundamentals could include supply and demand data. Many of these data points are present on economic calendars and may be accessed via major financial sites.When to Use Technical and Fundamental Analysis?

From personal experience, I employ a combination of the two techniques in so far as fundamental analysis is used as my base, where I tend to begin with an overview of the economic calendar pertaining to the asset class/currency pair. It is important to know when market moving events could occur in order to employ sound risk management technique.

Depending on your trade time horizon, these economic events could be more or less important. Price action encompasses the fundamentals (past releases) in any case but upcoming events challenge traders in a different way. This is why a sound understanding of fundamental principles can go a long way in enhancing a trading strategy.

Moving to technical analysis, there are an infinite number of approaches and combinations one can use to trade and I found that beginning with a good foundation of technical tools helps each trader to find their personal trading style. My style incorporates an amalgamation of price action and one or two indicators at most but each trader will find what best suits their style in time . My use of fundamentals first and technical analysis second is just one way to use the two methods however, many advocates of the respective systems have been successful in a singular use. There is no 'one size fits all' or hard and fast rules around what to use when but it is imperative to understand the purpose and assumptions behind methods you wish to employ. How to Trade with Technical and Fundamental Analysis?

As mentioned above, trading as a singular means of analysis or combination can work in practice which is why I have included examples of all three approaches to demonstrate the versatility in analysis procedure.

TECHNICAL ANALYSIS EXAMPLE

The chart above shows a modest yet effective technical analysis setup using trendlines, an SMA and RSI. Joining highs and lows using trendlines is a great way of gauging the overall trend of the market as well as possible strained trade positioning (blue). This is often the first port of call in my technical analysis set-up after which I look to insert my indicators.

The RSI is used to show any extreme bias in the market and is marked by the green and red areas on the RSI respectively (on the chart above). Finally, I have included an SMA (50 and 100). The SMA is a multipurpose indicator that can help evaluate or support trend direction – if prices are above the SMA's, a bullish bias is favored and vice versa. Furthermore, SMA crossovers (yellow) can be indicative of an upcoming upside or downside move – bullish when the shorter-term SMA (red) crosses above the longer-term SMA (black) with the same logic being applied for the inverse. Key psychological levels and areas of confluence play an important role in trader psychology, this has been eliminated from this example but should not be overlooked in real world application.

FUNDAMENTAL ANALYSIS EXAMPLE

A major driver of FX prices derive from interest rates and their differentials. The monthly NZD/USD chart above shows the beginning of monetary policy easing by the RBNZ in April 2015 while the Fed began increasing rates shortly after. The result is a depreciation of the NZD against the dollar as the attractiveness of a higher interest rate pulls investors to US assets and foreign direct investment thus increasing the demand for USD. This simple example of interest rate dynamics shows the influence of economic theory on the FX market and how it can help traders gain a tactical edge.

TECHNICAL AND FUNDAMENTAL ANALYSIS EXAMPLE

The last example and my personal preference utilizes both technical and fundamental analysis. This may arguably be the most complex of the three scenarios but has proven to be effective in my experience. The weekly Dollar Index (DXY) chart above involves price action, trendlines, candlestick patterns, indicators and fundamental knowledge.

Starting with the Fed rate hike labeled on the chart; leading up to the actual announcement markets had some inclination of a looming rate hike by following prior statements made by Fed officials and money market pricing - most of this information can be accessed from major financial media outlets and trading education websites free of charge. Knowing this, the immediate inclination for DXY price action would be to the upside but what do the technical show?

The weekly candle at the time of the announcement hovered around the key 95.00 psychological handle along with the bull pennant (yellow) support line and 50-day SMA. This is not a coincidence as technical analysis reflects fundamental conditions! From here on, a trader could wait for the weekly candle to close (blue) which provides an additional bullish signal via the lower long wick in this case.

My involvement in trading tells me the greater the number of factors/signs in favor of a particular direction, the better the chances of a successful trade. Should the trade move against the intended direction, using price action data such as swing lows and highs can help with placing suitable stops which are absent in purely fundamental trading. Technical vs Fundamental Analysis: Frequently Asked Questions (FAQs)

Advantages and Disadvantages of Technical and Fundamental Analysis

Is Technical Analysis more Profitable than Fundamental Analysis?

Both technical and fundamental analysis have pros and cons but neither can be given the title of most profitable analysis type. Many traders have been profitable within both specialties and will depend on the traders goals, time horizon and risk appetite. Many factors have to be considered when deciding on a trading strategy and will differ from person to person which is why testing trading strategies beforehand on demo accounts/platforms will greatly improve your trade process when entering the live environment.

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