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Fundamental Analysis vs. Technical Analysis by Marilyn McDonalD Chapter 4 Fundamental Analysis vs. Technical Analysis BUY NOW 19 Chapter Four: Fundamental Analysis vs. Technical Analysis I am sure you have heard about both Fundamental and Technical Analy-sis, and now you are left pondering, Which one works for me? Every-one has their own opinion and will vehemently defend their view. My suggestion is to consider both in your daily trading. Technical analysts can point to example after example of why this type of analysis is the one you should use; but, if you have ever watched what happens to the markets on Non Farm Payroll Friday, then you cannot deny the power of Fundamental Analysis. See why I recommend that you consider both? Let’s take a closer look. You are trading on the first Friday of the month. Your chosen currency pair is in an uptrend, all your indicators say buy and the economic data comes in positive. You should feel confident about going long during the new announcement. You may even feel confident staying in your trade through the weekend and into the next week. Now, if the trend is short, and the indicators are saying sell, but the eco-nomic data comes in positive, you may choose to go long during the news announcement, but will likely get out of this trade as soon as you make your desired profit. According to your technical analysis, the price is heading down, so you really shouldn’t stay in over the weekend. 20 FOREX Simplified Limiting yourself to one style of analysis is a mistake. The more infor-mation you can gather regarding your currency pair, the better equipped you will be to trade in this highly volatile market. Fundamental Analysis Every time you hear someone talking about fundamental analysis in the Forex market you may notice that there is often very little informa-tion informing you how to perform your own fundamental analysis. Most traders (including myself) are left with questions like, I don’t get it, is there a PE ration of Japan? Well, sort of. Fundamental analysis differs for the Forex market just a little bit, but some of the basic prin-ciples apply. Fundamental analysis for the Forex market examines the macroeconom-ic indicators, asset markets, and political considerations of one nation’s currency as opposed to another. Macroeconomic indicators include things such as: growth rates (Gross Domestic Product), interest rates, inflation, unemployment, money supply, foreign exchange reserves, and productivity. Other macroeconomic indicators include the CPI, a mea-surement of the cost of living, and the PPI, a measurement of the cost of producing goods. Asset markets are made up of stocks, bonds, and real estate. Political considerations influence the level of confidence in a nation’s government, the climate of stability, and level of certainty. There is a basic rule of thumb that says a currency can become more valuable in two main ways: when the amount of currency available in the world market place is reduced (for example, when the U.S. government raises the interest rates and causes a reduction in spending), or when there is an increase in the demand for that particular currency. But there are also many little things that can nudge the currency’s value enough for the retail Forex trader to make (or lose) a substantial amount. Let’s take a moment to examine some of the fundamental information that has the potential to move the Forex market. 21 FOREX Simplified Getting a Bird’s Eye View If you want a solid view of the economy driving the currency pair you are trading, it is helpful to get a good overview of both currencies. One way to perform a more complete fundamental breakdown of a currency pair is to compile the following information: Daily range (past x days): Average: Median: Weekly range (past x weeks): Average: Median: For each pair list: Daily range Weekly range 52 week high/low: Next Central Bank Meeting Date: GDP (annualized growth): Short term interest rate expectations: How are inflation rates? Unemployment rates: Filling out this form may help you examine the health of your chosen currency pair. Checking Out the Macros An interesting number to watch when you are checking out the macro-economics of a country is the interest rate. Be careful not to jump to any premature decisions because, interest rates work like a split personality and can have both a strengthening and a weakening effect on your cur-rency. On