The Importance of Fundamental Analysis

Technical analysis seeks a trading decision based on the actions of a chart. Fundamental analysis considers the economic reasons as to why that financial product is moving. The most common question on a trader’s lips is: which matters more? Well, it really depends on the product traded.

Fundamental Analysis of the Foreign Exchange Market

This is a 24hr market with plenty of historical data readily available for gauging future price activities. The statistical significance of a the forecast is increased, making it ideal for traders looking to map out trends with the use of technical tools; charts and indicators.

However, generally when trading forex, the price action is definitely motivated by the economic calendar and any further financial news released by the relevant regions. After all, trading a currency pair requires successful analysis of both the monetary differences between these currencies, as well as the geopolitical status of the corresponding countries involved.

Fundamental Analysis of the Equities Market

With consideration of the equities market, your attention to the economic calendar will depend on the class of asset you’re interested in trading.

If referring to the trade of indices, then surveying the economic calendar and identifying when major central banks are supposed to release their statements is obviously still key.

For example; if trading the Xetra Dax Index in Germany, we might be aware that correlations indicate that it is in an inverse correlation between the general index and the EURUSD pair, which move in opposite directions. That being said, looking at the economic calendar and interpreting the economic news as positive for the EURUSD pair may then leave us inconclusive. As such, trading a call option or going long for the Xetra Dax would not be a wise move.

Should you be trading a company’s stock, then any information relating to the time their dividend (if any) is going to be announced or when the company’s reports are due, is crucial to a successful analysis. A combination of general stock market news along with the internal situation of a company, are the aspects that help to move equities. This is why it is wise to evaluate a stock from more than one perspective, envisioning the company’s business ambitions and realised strategies, alongside any global political or economic events that may be occurring in the wider picture.

So, Which is Best?

The short answer is that all markets have the tendency to consolidate and when this consolidation is over, there is a need for movement in order for a price to break. This move will require a fundamental explanation, and this is the difference between (and logic for) using both analysis techniques. If technical analysis represents the set-up a trader is already seeing, then fundamental analysis always offers a reason for why the price is moving. A trader would be wise to consider a variety of elements that may be of influence to their instrument, approaching with analysis from both sides for a more well-rounded view.