The Two Main Types of Analysis
To make sense of market drivers and predict price movements, traders use two primary forms of analysis:
This is just an overview to introduce you to both approaches. We'll dive deep into each method with practical examples in the Fundamental Analysis Basics and Technical Analysis Basics modules.
Fundamental Analysis
The Big Picture Approach
Fundamental analysis involves examining the economic, social, and political forces that drive supply and demand for a currency. A fundamental analyst studies interest rates, economic reports (like GDP, employment data, inflation), and geopolitical events to determine if a currency is overvalued or undervalued relative to another.
Think of it like evaluating a company before buying its stock—you look at its financial health, management, and market position. In forex, you're evaluating entire economies. If Country A has strong economic growth, low unemployment, and rising interest rates while Country B struggles with recession and falling rates, fundamental analysis would suggest buying Currency A and selling Currency B.
Example: "The US Federal Reserve is raising interest rates to combat inflation while the European Central Bank maintains low rates. This interest rate differential should attract investors to USD-denominated assets, strengthening USD against EUR."
Technical Analysis
Chart Patterns & Price Action
Technical analysis involves studying price charts and historical data. Technical analysts believe that all known information—economic data, news, sentiment—is already reflected in the current price. Therefore, by analyzing how prices have moved in the past, they can identify patterns and trends that tend to repeat, helping predict future movements.
Technical traders use tools like support and resistance levels, trend lines, chart patterns (head and shoulders, double tops), and technical indicators (moving averages, Relative Strength Index or RSI, MACD or Moving Average Convergence Divergence) to identify high-probability trading opportunities. The focus is on timing: when to enter and exit trades based on what the chart is showing.
Example: "EUR/USD has been forming a double top pattern at the 1.1000 resistance level with declining volume. Additionally, the RSI shows overbought conditions. This suggests a potential reversal to the downside."
Key Differences at a Glance
While both approaches aim to predict price movements, they operate on different principles and timeframes. Understanding these differences helps you choose the right approach for your trading style.
Fundamental Analysis
- •Focus: Why prices should move
- •Timeframe: Long-term (weeks to months)
- •Tools: Economic calendars, news, central bank reports
- •Best for: Understanding market direction and long-term trends
- •Answers: "Is this currency undervalued or overvalued?"
Technical Analysis
- •Focus: When prices are likely to move
- •Timeframe: Short to medium-term (minutes to weeks)
- •Tools: Price charts, indicators, patterns, support/resistance
- •Best for: Timing entries and exits, identifying trends
- •Answers: "When should I enter or exit this trade?"
Best Practice: Combining Both Approaches
Most successful traders use a combination of both methods. Here's how it works in practice: They start with fundamental analysis to form a long-term directional bias. For example, if the US economy is strengthening with rising interest rates while Europe's economy is stagnating, fundamentals suggest buying USD against EUR.
Once they have this directional bias, they switch to technical analysis to find the precise, low-risk entry point. Instead of buying immediately, they wait for the chart to show a clear technical setup—perhaps a pullback to a support level or a breakout above resistance—before entering the trade. This combined approach helps you trade in the right direction (fundamentals) at the right time (technicals), significantly improving your odds of success.