Fundamental Or Technical Analysis?

Basically, forex traders always use two different approaches to make decisions in forex trading. The first approach is Technical Analysis, and the other one is Fundamental Analysis. But we added 1 more approach which was not included among two approaches above. We call it Logical Analysis.

What does Fundamental, Technical, and Logical Analysis mean ?

Technical Analysis is the art of forecasting price movements through the study of chart patterns, indicator signals, sentiment readings, volume, open interest, and other mathematical analysis to identify trading opportunities.

Fundamental Analysis focuses on key underlying economic and political factors to determine the direction of a currency's value. Fundamentalists predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumors. There are a number of fundamental indicators traders may follow that reflect how an economy is changing and gleam insight into Forex market prices to come.

Logical Analysis is an approach to exploit the law of eternal balance in the universe (its like the eternal balance of yin and yang). Forex and every matter in this world are affected by the universe. Hence this approach can be implemented in forex as well. Later we will give you a very profitable trading system to gain an enormous profit based on this method.

Fundamental, Technical, and Logical Analysis. Which one is the best ?

Technical traders usually say that it is impossible to trade on the news, because the market moves so fast. In the other hand, fundamentalists say that only the news move the market and indicator is always a follower.

The big question is what actually moves the forex market? It is trader's expectation and speculation that moves the market! Neither the news nor the graphs move the market. The most dramatic price movements, however, occur when unexpected events happen.

There is another important question you should think of: How much money is traded by fundamentalists, and how much money is traded by technical traders?

We will tell you a little secret in forex industry. Do you know that almost all of big banks, hedge funds, and other big financial institutions trade using Fundamental Analysis? And unfotunately those big financial institutions have the biggest amount of money in the world.

So what is the correlation with forex market? It is very rational and predictable : At the time they open trades (using a large amount of money), the market moves accordingly. What do fundamentals do ? If the news report for a country is better than expected, that country's currency usually gets stronger and moves the price, if it's worse, that currency will be weaker and moves the price to the other way.

Do you know why there is only a small amount of fundamental forex trading e-book taught by forex brokers out there ? This probably has something to do with more profitable nature of fundamental analysis. As you know, some brokers dont like if their customers win. If you win they will lose (they trade against you).

What about technical traders ? It seems that most of technical traders and small traders don't have such a lot of money compared to big financial institutions, even altogether.

For complexity, there are lots of different indicators and timeframes used in technical analysis. At the same moment, each of them are giving different signals.

The conclusion is we prefer to use fundamental analysis compared to technical. Then what about logical analysis ? To be honest, logical analysis the best method to trade forex, as it will give you a constant, reliable, and greatest result almost all the time.

Forex Trading Tips

Trading tips suitable for Technical Traders : Only use the most common, widely used Trading Indicators and Never trade during important News Accouncement Time.

Trading tips suitable for Fundamental Traders : Be patient, discipline, use an accurate clock and only trade during important news release.

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Major Economic Indicators

Economic indicators play a huge role in the forex market, particularly in the form of fundamental analysis. Some of the most influential indicators for the dollar include Non Farm Payroll, Federal Open Market Committee (FOMC) interest rate decisions, trade balance, Consumer Price Index (CPI), and retail sales.

Non Farm Payroll (NFP) is a good indicator of the employment rate and overall strength of the labor market. It represents all business employees excluding general government employees, private household employees, and employees of nonprofit organizations, accounting for about 80% of the workers who contribute to GDP. The full report also includes estimates on the average work week and weekly earnings of these employees. As a general indicator of the health of the economy, usually the dollar in forex trading is affected more the further from expectations the figure for NFP turns out to be. The general trend for NFP since 1990 has been increasing. Overall, NFP has increased from 109,144 in January of 1990 to 135,106 in May of 2006. Generally, when NFP is lower than expected traders will begin to sell the US dollar on the belief that it is weakening. The opposite is true for an unexpectedly high NFP. NFP is released at 8:30am EST on the first Friday of every month and tends to cause an average move of 124 pips in the EUR/USD.

Federal Open Market Committee (FOMC) decisions in general indicate the overall strength of the economy. The FOMC sets the discount rate or federal funds rate (the rate that the Federal Reserve Bank charges member banks for overnight loans) which is highly influential on the forex market. Because interest rates are set higher to induce foreign investment and therefore fight inflation during times of prosperity and lower to increase spending during recessions, they are an important indicator of the strength of the dollar. Increases in interest rates tend to lead to a strengthening of the dollar, while decreases usually precede a depreciation. Therefore, following rate hikes traders usually buy the dollar, anticipating an increase in its value. The opposite is true when the FOMC reduces rates. For the past 15 years the federal funds rate has experienced a net decrease, from 8.23% in January of 1990 to 4.94% in May of 2006, with periods of significant variance inbetween. There are eight scheduled FOMC meetings per year, each of which is usually followed by an average move of about 74 pips in the EUR/USD.

Trade balance measures the difference in value of the goods and services the US imports and those that it exports. From another perspective, it may also be considered the difference between national savings and national investment. A surplus exists if the exports exceed the imports, and a deficit, the current situation for the US, exists if the opposite is true. The balance can be affected by a variety of factors, including prices of domestic goods, exchange rates, trade agreements or barriers, and other trade regulations such as tariffs. Trade surpluses are generally not bad for the economy, but may lead to harmful protectionist policies. Deficits may lead to loss of jobs and problems with debt servicing. The US has had a trade deficit since the 1970s, at $101.7 billion in 1990, $716.7 billion in 2005, and continuously increasing. This could be because of the dollar’s use as a reserve currency and its overall strength, the growth of the US economy, high demand for American investment assets, rising oil prices, and globalization. Depreciating the dollar could be a possible solution to this imbalance, through a variety of methods. This would give consumers less purchasing power, ideally leading to a decrease in imports. This makes the trade balance less relevant as an immediate influence on forex trading but rather valuable as an alert to likely future Fed decisions. In general, however, a deficit is considered a sign of US economic weakness and therefore may lead traders to short the dollar. Trade balance is usually released near the middle of the second month after the reporting period and is followed by an average move of 64 pips in the price of the EUR/USD.

The Consumer Price Index (CPI) is a statistical measure representing inflation based on a fixed basket of consumer goods. Used to deflate other economic indicators and set wages, CPI is useful throughout the economy. The US CPI has been steadily increasing for the past 15 years, from 127.5 in January of 1990 to 201.0 in April of 2006. The response of traders to CPI is difficult to predict because although a high CPI is a signal of trouble in the economy, prompting traders to short the USD, it also tends to forecast interest rate increases by the Fed to which traders usually respond by buying. CPI is released around the 13th of every month at 8:30am EST followed by an average move in the EUR/USD of 44 pips.

Retail sales is a figure measuring the amount of goods sold by a sampling of stores, meant to be representative of consumer activity and confidence in the economy. Therefore, high retail sales numbers imply a strong economy. The retail trade sector, as delineated in the North American Industry Classification System (NAICS) is considered to include companies selling finished goods or rendering services incidental to the sale of finished goods. Since 1992 the US retail sales numbers have been steadily increasing, jumping from $147.14 billion in January of 1990 to $328.77 billion in May of 2006. Generally forex traders respond positively to high US retail sales numbers and long the dollar, shorting it when the figure is lower than expected. Retail sales numbers are announced around the 11th of every month at 8:30am EST causing an average 44-pip movement in the EUR/USD

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Forex Fundamental Analysis

Forex fundamental analysis is one of two widely recognized approaches to foreign exchange market analysis.

An alternative to technical analysis, which makes use of market trends (i.e. chart analysis) to determine the future value of a particular currency in the FX market, fundamental analysis describes methods of present and future valuation determined by social, economic, and political variables. While technical analysis is praised for its effectiveness at predicting short-term trends (under 3 months), the fundamental analysis approach is better suited at forecasting long-term movement in the FX market.Employing fundamental analysis strategies requires a basic understanding of supply and demand, the underlying force behind all financial markets. In the case of the FX market, the commodity being exchanged is a particular currency. Because the value of a currency is derived from the economic health of its respective country, global (or local) macroeconomic changes can invariably have an impact on currency rates. Fundamental analysis itself is broken down into two broad subcategories: capital flows and trade flows.

Capital Flows in Fundamental Analysis
A country's capital flows are the net quantity of currency being traded through capital investments, including equity market investments, fixed income market investments, third party licensing agreements, joint ventures, and foreign direct investment—all of which must be considered in fundamental analysis. The first two are the flow of portfolio investments and international government bonds, while the latter three represent the physical flows of capital that serve as financial indicators of stability and growth. Together, they are known as the capital flows.

Trade Flows in Fundamental Analysis
Also known as current accounts, these flows measure the net of imports and exports of a particular country, and the subsequent impact that these flows can have on the value of a currency. The reason that international trade plays an important role in fundamental analysis, and ultimately in FX market, is that importers are required to sell currency used to purchase goods and services being exported. Following this logic, countries that have positive trade flows (exports are higher than imports) run surpluses that serve to increase their currency, while the opposite is true of net importers. This aspect of fundamental analysis is one of the most influential, frequently providing insights into movements in a currency's price.

For more information regarding Fundamental Analysis, see the links in the left section: you can:

• Review information on six major economic indicators,
• Browse links for applicable foreign exchange news sites,
• See a listing of major governmental web pages and other sources of direct fundamental information feeds
• Look at a selection of recommended foreign exchange brokers to begin your own excursion in foreign exchange trading.

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Fundamental Analysis: What Is It?

In this section we are going to review the basics of fundamental analysis, examine how it can be broken down into quantitative and qualitative factors, introduce the subject of intrinsic value and conclude with some of the downfalls of using this technique.

The Very Basics

When talking about stocks, fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company's actual business and its future prospects. On a broader scope, you can perform fundamental analysis on industries or the economy as a whole. The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements. Fundamental analysis serves to answer questions, such as:

• Is the company’s revenue growing?
• Is it actually making a profit?
• Is it in a strong-enough position to beat out its competitors in the future?
• Is it able to repay its debts?
• Is management trying to "cook the books"?

Of course, these are very involved questions, and there are literally hundreds of others you might have about a company. It all really boils down to one question: Is the company’s stock a good investment? Think of fundamental analysis as a toolbox to help you answer this question. Note: The term fundamental analysis is used most often in the context of stocks, but you can perform fundamental analysis on any security, from a bond to a derivative. As long as you look at the economic fundamentals, you are doing fundamental analysis. For the purpose of this tutorial, fundamental analysis always is referred to in the context of stocks.

Fundamentals: Quantitative and Qualitative

You could define fundamental analysis as “researching the fundamentals”, but that doesn’t tell you a whole lot unless you know what fundamentals are. As we mentioned in the introduction, the big problem with defining fundamentals is that it can include anything related to the economic well-being of a company. Obvious items include things like revenue and profit, but fundamentals also include everything from a company’s market share to the quality of its management. The various fundamental factors can be grouped into two categories: quantitative and qualitative. The financial meaning of these terms isn’t all that different from their regular definitions. Here is how the MSN Encarta dictionary defines the terms :

• Quantitative – capable of being measured or expressed in numerical terms.
• Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity.

In our context, quantitative fundamentals are numeric, measurable characteristics about a business. It’s easy to see how the biggest source of quantitative data is the financial statements. You can measure revenue, profit, assets and more with great precision. Turning to qualitative fundamentals, these are the less tangible factors surrounding a business - things such as the quality of a company’s board members and key executives, its brand-name recognition, patents or proprietary technology.

Quantitative Meets Qualitative

Neither qualitative nor quantitative analysis is inherently better than the other. Instead, many analysts consider qualitative factors in conjunction with the hard, quantitative factors. Take the Coca-Cola Company, for example. When examining its stock, an analyst might look at the stock’s annual dividend payout, earnings per share, P/E ratio and many other quantitative factors. However, no analysis of Coca-Cola would be complete without taking into account its brand recognition. Anybody can start a company that sells sugar and water, but few companies on earth are recognized by billions of people. It’s tough to put your finger on exactly what the Coke brand is worth, but you can be sure that it’s an essential ingredient contributing to the company’s ongoing success.

The Concept of Intrinsic Value

Before we get any further, we have to address the subject of intrinsic value. One of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stock’s “real” value. After all, why would you be doing price analysis if the stock market were always correct? In financial jargon, this true value is known as the intrinsic value. For example, let’s say that a company’s stock was trading at $20. After doing extensive homework on the company, you determine that it really is worth $25. In other words, you determine the intrinsic value of the firm to be $25. This is clearly relevant because an investor wants to buy stocks that are trading at prices significantly below their estimated intrinsic value. This leads us to one of the second major assumptions of fundamental analysis: in the long run, the stock market will reflect the fundamentals. There is no point in buying a stock based on intrinsic value if the price never reflected that value. Nobody knows how long “the long run” really is. It could be days or years. This is what fundamental analysis is all about. By focusing on a particular business, an investor can estimate the intrinsic value of a firm and thus find opportunities where he or she can buy at a discount. If all goes well, the investment will pay off over time as the market catches up to the fundamentals.

The big unknowns are:

1. You don’t know if your estimate of intrinsic value is correct; and
2. You don’t know how long it will take for the intrinsic value to be reflected in the marketplace.

Criticisms of Fundamental Analysis

The biggest criticisms of fundamental analysis come primarily from two groups: proponents of technical analysis and believers of the “efficient market hypothesis”. Technical analysis is the other major form of security analysis. We’re not going to get into too much detail on the subject. (More information is available in our Introduction to Technical Analysis tutorial.)

Year after year, key players in the Forex market make a killing by picking the right currencies – now it’s your turn. Access industry gurus Boris and Kathy’s exclusive FREE report, The Five Things That Move the Currency Market – And How to Profit From Them, right now! Put simply, technical analysts base their investments (or, more precisely, their trades) solely on the price and volume movements of securities. Using charts and a number of other tools, they trade on momentum, not caring about the fundamentals. While it is possible to use both techniques in combination, one of the basic tenets of technical analysis is that the market discounts everything. Accordingly, all news about a company already is priced into a stock, and therefore a stock’s price movements give more insight than the underlying fundamental factors of the business itself. Followers of the efficient market hypothesis, however, are usually in disagreement with both fundamental and technical analysts. The efficient market hypothesis contends that it is essentially impossible to produce market-beating returns in the long run, through either fundamental or technical analysis. The rationale for this argument is that, since the market efficiently prices all stocks on an ongoing basis, any opportunities for excess returns derived from fundamental (or technical) analysis would be almost immediately whittled away by the market’s many participants, making it impossible for anyone to meaningfully outperform the market over the long term.

By Cory Janssen, Co-Founder, Investopedia.com; Ben McClure, Contributor - Investopedia Advisor and Investopedia Staff, (Investopedia.com)

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The Basics of Forex Trading Economic Indicators

Economic indicators are an essential and primary part of the world of economy and the Forex trading market. In our previous articles about different approaches towards market analysis we have briefly discussed this concepts and emphasized their affect on your trading system. In this article we will try to illuminate the importance of this indicators even further. The term 'economic indicators' stands for a wide variety of financial statistics, figures and evaluations. This info is being processed, studied and then released by several financial establishments around the world, such as national treasuries and large investment banks.
The Forex trading indicators are a powerful device that is used by these establishments to better understand and trace the changes in the world economy. Although the indicators originally had a different function they are now closely watched by all investors around the world. Each smart investor waits anxiously to the release date of each of the indicators and knows how to act upon them. Most people presume that it is almost impossible to understand economical concepts such as indicators without an economics school degree. This is of course false. If you want to use indicators as a tool to improve your forex trading then you are more than able to do this without any academic education. In this series of articles we will present you with several guiding principles that are bound to turn you into a better forex trader in no time.
The first thing on your list is to learn the release dates of each of the economical indicators. Keeping an organized calendar near your trading station (your home or office computer) with each of the release dates marked will make the job much easier. You can find all the release dates for all the indicators in many places around the net but generally the best places to look are http://www.ny.frb.org/ and http://www.worldbank.org/. Following the calendar will be very useful in more than one way. Many price shifts and sudden rallies that could confuse you in the past are now easily explained by their proximity to one of the release dates. The calendar will help you feel the pulse of the forex market. Economic indicators can affect the market both in a immediate straightforward manner and also in a more subtle, roundabout way. When traders act upon the data that they learned from the indicators this is a direct affect of the indicator's release. When traders move to better positions according to their expectations of the indicator, this is an indirect affect on the market. When prices shift just before the release date of a certain indicator because traders move to a better position according to what they expect from an indicator, it is an indirect affect on the market. We strongly advise you to keep reading our next articles which will deal with more advanced concepts of economic indicators.

By Dan Princeton, Editor

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