The Beaver vs. The Wolf: Should Fundamentals Fear Technicals? (A Newbie's Dilemma)

Trading Discussion
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Greetings, Trading Discussion fam!

As a forex newbie, I’m diving headfirst into the world of analysis, and let me tell you, it’s a jungle out there! I’m particularly fascinated by the two dominant forces: the fundamental analysis beavers, diligently building their dams of company strength, and the technical analysis wolves, howling at the patterns on the charts.

But here’s my question: Do these two analysis styles have to be locked in an epic battle? Can’t a peaceful coexistence exist, where the beavers’ strong foundation informs the wolves’ hunting tactics (i.e. entry and exit points)?

For instance, imagine a company with solid financials (our trusty beaver) but a technical chart showing a potential breakout (the wolf’s keen eyes). This could be a sweet harmony, right?

Here’s what I’m curious about:

  • Do experienced traders use a blend of fundamental and technical analysis?
  • If so, how do you weigh the importance of each in your trading decisions?
  • Are there specific market conditions where one analysis shines brighter than the other?

I’m eager to learn from the wisdom of the pack! Let’s discuss how these two seemingly opposing forces can work together to make us all better forex hunters.

Thanks in advance for sharing your insights!

Aman, the Curious Forex Cub

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Yes, some do.
You could be well advised to review fundamentals of any currency in the pair you intend to trade as a confirmatory signal to back up your technical analysis. See the babypips Learn Crypto training on Fundamental Analysis.
Yes, the more overbought or oversold any specific currency has become (COT reports), the higher the probability of success if fundamental analysis aligns with technical analysis.

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My usual trades over the years have been long-term tend-following trades on the daily time-frame. I ignore the economic calendar when planning and running these. Price is set by the giant multi-national players and if the trend is continuing, then they obviously think price will continue in that direction. They are smarter than I am and they have nore informaiton at their finger-tips, so if they are buying I am not going to be a seller.

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These are not really opposing forces at all, they are simply analysing the same thing in different ways by focusing on different aspects of price.

With fundamental analysis the trader considers what factors are likely to affect the price of a particular instrument and then analyses what those factors are currently doing and how the instrument’s price is likely to react. The trader then takes a position based on their view. Typical factors might include Central Bank policy, interest rate levels, inflation rates, commodity prices, labour and energy costs, etc, etc.

Inevitably, this is more relevant to longer term positions since economic factors take time to work out. And although the analysis may be correct directionally, it is not so subtle in defining actual prices for entry or exit.

The alternative to personally developing one’s own view based on fundamentals is to analysis what everyone else is thinking instead. But the only relevant useful information is what the majority of people are actually doing in the markets and not just what they are thinking.

And how do we know what the majority of other participants are doing? We analyse price movement instead of the underlying fundamental forces driving that price movement. I.e. technical analysis.

Fundamental forces drive markets in the longer term, whereas sentiment and, to a certain extent, technical analysis itself drive price in the short term.

Personally, I think it is good practice to follow both approaches. It adds a lot of interest and knowledge to study the products and markets that one trades as well as the factors that influence those markets.

Even if one develops one’s own theories about where price should be going based on a personal view of fundamentals, it is very useful to apply technical analysis to price to determine if and when the majority of others are actually thinking the same - or not!

In addition, TA can define more suitable and accurate levels where to enter a market and where to exit - especially where to define that the view was wrong and time to get out.

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