Fundamental and Technical Analysis with Forex

Whenever we are looking to make a decision about the status of a trade, we will look to certain types of evidence to suggest what the outlook over a certain period of time may be. We will then base our decisions to either enter, hold, or exit a position based upon the preponderance of this evidence.

There are two main types of evidence that is used when analyzing trades or investments, which are fundamental and technical analysis.

Fundamental analysis is an examination of the outside factors that may affect or may be affecting the supply and demand of the instrument, in our case with forex, each of the two currencies represented in a tradeable currency pair.

Fundamental and Technical Analysis with ForexIf we are trading the EURUSD for instance, things that may affect the supply and demand of the euro are looked at, economic data for instance, and we also will take a similar examination of factors that may affect the supply and demand of the other currency, in this case, the U.S. dollar.

These factors may include things like what may drive the supply and demand for a currency directly or indirectly. Direct factors can be things like interest rate forecasts for the currency, while indirect factors may include such things as increasing demand for a currency that arises from people moving from a weakening currency to something like the USD.

As you might imagine, fundamental analysis of currencies can be pretty complex indeed, and when you add in the fact that you are actually comparing not one but two fundamental analyses, and seeking to determine the relative influence of these factors between the two currencies, this makes things even more complicated.

Some traders think that they can trade based upon fundamental analysis by just looking at a few simple things, but the market is driven by the totality of these fundamental influences, and looking to oversimplify will tend to yield analysis that is based upon incomplete information, the parts that are more complex and are left out of very simple analysis.

As individual traders, when we seek to trade based upon fundamental analysis, we need to be aware that we are competing with some very large institutions with the best people and the most resources, and to think that we can obtain a meaningful advantage by looking to achieve better analysis overall than these huge players can manage isn’t at all realistic.

Fundamental Analysis is Already Priced in Fully

One of the criticisms of fundamental analysis is that all that is known and is actionable becomes actioned, meaning that any fundamental data that will influence the market already does so by virtue of its ongoing effect on the market.

If, for instance, there is a concern with the economy represented by a certain currency, traders will act upon this concern and effect its price. This all happens in real time, where at any given time, we can say that all that is known and all that is believed about the fundamentals of currencies make their way into the trading of currencies as this information becomes known and altered.

As these beliefs shift, as those who are responsible for holding them, the experts we can say, change their minds, this becomes reflected in the price as the opinions change. This is especially the case with currencies as the major players, governments and big banks, represent almost all of the market activity and drive the price of currencies based upon their best opinions on an ongoing basis.

A lot of forex traders are under the impression that they can use a little fundamental analysis and gain a trading advantage, but they need to ask themselves where this advantage might come from, and the honest answer is that they really have no advantage and are actually at a significant disadvantage here due to their lack of information and lack of analytical skills compared to the big players.

Price Movements Themselves Tell the Story Though

Make no mistake, fundamental analysis does play a huge role in the movement of currencies, and much more so than anything else. Stocks, for instance, aren’t really driven very much by fundamental analysis and their prices are much more driven by changes in investor behavior and outlook, where if they are bullish on the market or have more money to invest in them, that will drive the price of stocks up by their putting more money in the market, and vice versa when they are bearish or have less to invest.

Currencies are different though, and while there are movements to and from currencies due to preference, even these moves are driven by fundamentals, the reasons behind wanting to flee one currency for another for instance.

These fundamental influencers always show themselves in the price of currencies though, and we can tell exactly what the net result of changing fundamentals between currency pairs is by just looking at how the price of the pair trade is moving.

Trying to go beyond this is simply looking to predict the future, and predict it better than the market with all their information and resources, and be more right about all this by enough of a degree to trade profitably. This is simply not realistic at all.

Even though fundamentals dominate the forex market, there are other factors involved apart from this, for instance moves in price driven by the buying and selling of currency itself. For example, if a government or a bank is looking to take a big position in a currency, this won’t happen instantly, and far from it, as these positions involve billions of dollars and take time to place in the market.

Even with patience, these acquisitions do in themselves influence price, which is apart from fundamentals, this is market action driven. If we see for instance that the price action of a pair is moving a certain way, we know that someone is on this side of the trade and their trading influence or the sum of these influences may persist over a given period of time as their orders get placed.

Price movement itself can also drive price movement by way of momentum, and even though currency markets are less momentum driven than something like stocks, or especially cryptocurrencies, this does play somewhat of a role. The reason is that currencies are always in a state of accumulation and distribution, more or less demand for it, and price movements can in themselves influence buying and selling decisions as major players may see their need to hedge altered by this and cause them to accumulate or distribute the currencies in turn.

In any event, when we see price momentum with currencies, it does not matter why, it only matters that it is happening and we can just look to measure and predict these price movements directly, which is what we call technical analysis.

Technical Analysis with Forex Trading

Even if we could gain a tradeable advantage with using fundamental analysis with forex trading, fundamental analysis concerns itself with the longer-term future, and with forex trading, we instead need to be looking at the present and the very near future.

If we’re looking to decide where the price of a currency pair will be in a few minutes, an hour, or the next day or next few days, we really can’t expect to get much good information from any sort of fundamental analysis. This would be like looking at a company’s projected earnings over the next year or even over the next quarter when we’re day trading the stock.

This of course makes no sense because this analysis is directed at a time frame that is well beyond ours, and what we need to focus on instead is where the price is headed over the much shorter time period that we’re looking to trade it in.

By its very nature, retail forex trading needs to be exclusively concerned with the very short term only. Traders may select time frames from within this very short time frame, holding for a few minutes or a few days or anything in between, but if we go beyond that we are exposing our account to way too much risk due to the leverage involved.

People don’t invest in currencies and while one could, the returns aren’t there, but you get quite a bit of risk. We’d be far better off investing in stocks, which move a lot more, and provide a much better reward to risk ratio where straight up cash investing is concerned.

Forex trading can be lucrative though and way more than investing in anything can be, and this is because we have the power to use a lot of leverage with our forex trades, 30 times or more. Each percent nominal gain gets multiplied by the amount of leverage we use.

While we need to be careful and not use an excessive amount of leverage like 100 times or more, because we cannot manage the risk properly with too much leverage, if we are skilled, we can manage the risk with more reasonable amounts like 20 to 30 times our stake.

In order to make forex trading profitable, we require a high amount of leverage, and in order to trade with a high amount of leverage and manage risk, this requires us to trade in very short time frames. Longer time frame trades require more room to breathe, which means more risk, and we cannot have the trade work in the end but see ourselves with a margin call while this is going on, or anything remotely close.

If we are only risking 2% of our position max, and using leverage, a fairly small movement will stop us out, so if we try this with time frames longer than a few days we’re just going to see ourselves stopped out of trades far too often and just lose money overall no matter how good we are.

With short term trading, technical analysis is the only game in town. We could say that this is the case with even longer-term timeframes as well, although some may argue this, but there’s no argument against technical analysis with short term trading, as it’s the only way to make sense of our trading.

Technical analysis will have us studying the way forex pairs move and look to take advantages of momentum and opportunities to ride them over a certain period of time. This is the best way to trade period, even though some may prefer things like trading chart patterns, with forex there are few good candidates and we need to focus on determining which side the momentum is on and whether there is enough of it to trade and then look to get in on the right side of this.

Mastering technical analysis is the cornerstone of all trading, including trading forex. In order to be successful at trading, we need to ensure that we are well enough versed in this to allow ourselves to make good enough trading decisions in order to create situations where over time we will be profitable.



Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

Contact Monica: [email protected]

Topics of interest: News & updates from the Office of the Comptroller of the Currency, Forex, Bullion, Taxation & more.