An entire generation of younger traders is starting to believe stocks, currencies and indexes don't go down and fundamentals don't really matter… Wake the fuck up.
There are two major ways to analyze financial markets: fundamental analysis and technical analysis.
Fundamental analysis is based on underlying economic conditions, while, technical analysis uses historical prices in an effort to predict future movements.
Ever since technical analysis first surfaced, there has been an ongoing debate as to which methodology is more successful. Short-term traders prefer to use technical analysis, focusing their strategies primarily on price action, while medium-term traders tend to use fundamental analysis to determine a currency's proper valuation, as well as its probable, future valuation.
Before implementing successful trading strategies, it is important to understand what drives the movements of currencies in the foreign exchange market. The best strategies tend to be the ones that combine both fundamental and technical analysis. Too often perfect technical formations have failed because of major fundamental events. The same occurs with fundamentals; there may be sharp gyrations in price action one day on the back of no economic news released, which suggests that the price action is random or based on nothing more than pattern formations. Therefore, it is very important for technical traders to be aware of the key economic data or events that are scheduled for release and, in turn, for fundamental traders to be aware of important technical levels on which the general market may be focusing.
Fundamental analysis
Fundamental analysis focuses on the economic, social, and political forces that drive supply and demand. Those using fundamental analysis as a trading tool look at various macroeconomic indicators such as growth rates, interest rates, inflation, and unemployment. Fundamental analysts will combine all of this information to assess current and future performance. This requires a great deal of work and thorough analysis, as there is no single set of beliefs that guides fundamental analysis. Traders employing fundamental analysis need to continually keep abreast of news and announcements that can indicate potential changes to the economic, social, and political environment. All traders should have some awareness of the broad economic conditions before placing trades. This is especially important for day traders who are trying to make trading decisions based on news events because even though Federal Reserve monetary policy decisions are always important, if the rate move is already completely priced into the market, then the actual reaction in the EUR/USD, say, could be nominal.
For day and swing traders, a tip for keeping on top of the broader economic picture is to figure out how economic data for a particular country stacks up.
There are basically two types of markets, trending and range-bound; in my latest book 'I Will Teach You How To trade In 20-Hours', I attempt to identify rules that would help traders determine what type of market they are currently trading in and what sort of trading opportunities they should be looking for.
However, it is important to take into consideration both strategies, as fundamentals can trigger technical movements such as breakouts or trend reversals, while technical analysis can explain moves that fundamentals may not, especially in quiet markets, such as resistance in trends.
Now, you don’t need to be economist to get the idea of fundamental factors behind market moves - pay attention to volume. And this is exactly what I trade and teach - technical structure with fundamental conviction. Price and volume pays, opinions don't.
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