Combining Technical Analysis with Fundamental Analysis
‘If fundamentals create the brains of the Market, technicals create a spirit and a soul’
Fundamental analysis studies the cause of a market movement while technical analysis studies the effect. These two major methods of analysis are used in order to explain the behavior of any financial market, but also in order to forecast the future market conditions.
There are three general approaches when trading any financial market:
As Warren Buffett said: “Price is what you pay and value is what you get”.
A fundamentalist will focus on the real value, while a technician will focus on the price movement. A wise analyst will always focus on both.
(1) Fundamental Analysis
“Nowadays people know the price of everything and the value of nothing.” -Oscar Wilde, The Picture of Dorian Gray
Fundamental analysis is based entirely on the study of economic, political, strategic, social, and other relevant factors that are able to affect the demand and the supply of a financial instrument in the future.
A fundamental analyst will focus always on value, and as the relationship between value and price is indirect, the fundamental analysis needs some time to get confirmed.
The Fundamental Trader
Fundamental traders weight the market dynamics of a basket of financial assets and analyze all economic releases and other relevant information that may affect them.
When trading Forex, the exchange rate of a currency pair incorporates the economic and geopolitical conditions of the two economies involved.
The Time Interval
Fundamental analysis is especially important to long-term traders and it is almost irrelevant to short-term traders.
There is an exemption to that rule. The news-traders, who open and close their positions intraday while trading exclusively key fundamental releases. In other words, they trade the short-term while being fundamentalists.