Technical analysis vs fundamental analysis

The main difference between fundamental and technical analysis consists in that technical analysis is the study of charts, trend lines, support, resistance levels and patterns. Technical traders follow this data in order to predict the direction a currency will take. Fundamental analysis includes the analysis and interpretation of global events, economic, political, financial events and other variables that may cause a currency to fluctuate.

Technical Analysis operates on the theory that market prices at any given point in time reflect all known factors affecting supply and demand for a particular market. Consequently, technical analysis focuses, not on evaluating those factors directly, but on an analysis of market prices themselves. This approach theorize that a detailed analysis of, among other things, actual daily, weekly and monthly price fluctuations is the most effective means of attempting to capitalize on the future course of price movements. Technical strategies generally utilize a series of mathematical measurements and calculations designed to monitor market activity. Trading decisions are based on signals generated by charts, manual calculations, computers or their combinations.

While technical analysis concentrates on the study of market action, fundamental analysis focuses on the economic forces which cause prices to move higher, or lower, or stay the same. The intrinsic value is what the fundamentals indicate one currency is actually worth against another currency. If this intrinsic value is under the current market price, then the currency is overpriced and should be sold. If market price is below the intrinsic value, then the market is undervalued and should be bought. Both of these approaches to market forecasting attempt to solve the same problem, that is, to determine the direction prices are likely to move. They just approach the problem from different directions.

A "fundamentalist" studies the cause of market movement, while a technician studies the effect. Most market traders classify themselves as either technicians or fundamentalists. In reality, there is a lot of overlap. Most fundamentalists have a working knowledge of the basic tenets of chart analysis. At the same time, most technicians have at least a passing awareness of the fundamentals. The problem is that the charts and fundamentals are often in conflict with each other. Usually at the beginning of important market moves, the fundamentals do not explain or support what the market seems to be doing. It is at these critical times in the trend that these two approaches seem to differ the most.

Fundamental Analysis is based on the study of factors external to the trading markets which affect the supply and demand of a particular market. It is in stark contrast to technical analysis since it focuses, not on price but on factors like weather, government policies, domestic and foreign political and economic events and changing trade prospects.

Fundamental analysis theorizes that by monitoring relevant supply and demand factors for a particular market, a state of current or potential disequilibrium of market conditions may be identified before the state has been reflected in the price level of that market. Fundamental analysis assumes that markets are imperfect, that information is not instantaneously assimilated or disseminated and that econometric models can be constructed to generate equilibrium prices, which may indicate that current prices are inconsistent with underlying economic conditions, and will, accordingly, change in the future.