Whether it is fundamental or technical, forex market analysis depends on two key principles. There are tools that can allow us to predict the future price action, and market movements are not completely random. That the first principle must be valid is obvious. If there were no tools with predictive capability, there would be no possibility of profiting from the price action. And if market movements were completely random, there would be no possibility of making predictions in any case.
Predictions are central to many forex strategies, and technical and fundamental studies use different methods for deriving them. The crucial difference lies in the fact that while technical analysis attempts to establish the future value of an asset (in our case, a currency pair), fundamental forex market analysis focuses on discovering whether it is undervalued, or overvalued at present.
Proponents of fundamentals analysis claim that it is difficult to be certain about the future value of any asset in the volatile environment of trading. The best approach is to concentrate on what the current prices are in the market, comparing those values with the theoretical prices determined by fundamentals, and on that basis deciding on the nature of our trade, fundamental analysts suggest. They blame technicians for using unreliable tools for predicting what is obviously unpredictable. At least in the short term, it is impossible to determine the direction of the price, they claim.
In fact, the difference between technical and fundamental analysis is not as deep as it will seem if we evaluate them based on their tools and mission statements. Where the fundamental analyst speaks of an imbalance of supply and demand, an irrational positioning of traders, or faulty risk perception, the technical analyst will speak of divergences, market overextension, panic, oversold or overbought levels, bubbles, and similar concepts, but in truth they all define the same underlying phenomena. The extreme imbalances of fundamental analysis are parabolic price trends in technical jargon. Irrational positioning may coincide with divergences. And panic may match a period of re balancing of fundamental factors.The crucial point is that these equivalences are valid only when the analysis is correct. When, for instance, an economic situation is coupled to a technical phenomenon (let’s say for example, that the stock prices enter a strong downtrend as banks contract lending and bankruptcies occur, as dictated by theory), the strong relationship is unfortunately devoid of any causality that may facilitate predictions, at least in the short term. In other words, it is not possible to predict the technical configurations that will be caused by economic processes, although we can be pretty sure that something will happen.
In sum, technical and fundamental analysis are just mirror images of each other. But the mirrors work only when there’s something to show. If either of the mirrors is broken (that is, the analysis is faulty), there will be nothing to match. Consequently, instead of worrying about the efficacy of either school, it is better to focus on perfecting our skills so that the analysis that we perform is the best, regardless of the school to which we belong.
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