Forex Study : Technical Analysis vs Fundamental Analysis

The initial data for technical analysis are prices: the highest and the lowest prices, the price of opening and closing within a certain period of time, and the volume of transactions. A technical analysis is founded on three suppositions:

• Movement of the market considers everything;
• Movement of prices is purposeful;
• History repeats itself.

That is, technical analysis is a statistical and mathematical analysis of previous quotes and a prognosis of coming prices.

Fundamental analysis is an analysis of current situation in the country of the currency, such as its economy, political events, and rumors. The country's economy depends on the rate of inflation and unemployment, on the interest rate of the Central Bank and on tax policy. Political stability also influences the exchange rate. Policy of the Central Bank has a special role, as concentrated interventions or refusal from them greatly influence the exchange rate.

At the same time one should not consider fundamental analysis just as an analysis of the economic situation in the country itself. A far bigger role in the FOREX market belongs to the expectations of the market participants and their assessment of these expectations. Various prognoses and bulletins, issued by the participants, have a strong influence on the expectations. Very often an effect of the so-called self-fulfilling prophecy occurs when market players raise or lower the exchange rates according to the prognosis. But deep and thorough fundamental analysis is available only for big banks with a staff of professional analysts and constant access to a wide field of information.

In spite of these different approaches, both forms of analysis complement one another. Traders, who act on the basis of a fundamental analysis, have to consider some technical characteristics of the market (the main rates of support, such as resistance and resale), and supporters of the technical approach to the market must track the main news (interest rates, important political events).