Should you trade based upon fundamentals or technicals? This is the $64 million question that traders have debated for decades and will probably continue to debate for decades to come.

Technical Analysis Vs. Fundamental Analysis
Technicals are based on forecasting the future using past price movements, also known as price action. Fundamentals, on the other hand, incorporate economic and political news to determine the future value of the currency pair. (For more, check out our Technical Analysis Tutorial and our Fundamental Analysis Tutorial. )

The question of which is better is far more difficult to answer. We have often seen fundamental factors rapidly shift the technical outlook, or technical factors explain a price move that fundamentals cannot. So the answer to the question is to use both. Both methods are important and have a hand in impacting price action. The real key, however, is to understand the benefit of each style and to know when to use each discipline. Fundamentals are good at dictating the broad themes in the market, while technicals are useful for identifying specific entry and exit levels. Fundamentals do not change in the blink of an eye: in the currency markets, fundamental themes can last for weeks, months and even years.

Using Both to Make a Move
For example, one of the biggest stories of 2016 was the UK referendum, which resulted in the decision for the UK to start the process of withdrawing from the European Union. As you can see from the two-year chart below, the results from the referendum (shown by the red circle) pushed the GBP/EUR below April 2016 swing low, which was a technical signal of the extreme fundamental shift. Unsurprisingly to many, downward pressure continued for months after the results were released and a new level of resistance was formed near 1.20

Figure 1 – GBP/EUR

Fundamentally, it was clear that the market was a very pound-negative environment; therefore, technically, we looked for opportunities to sell on the initial breakdown and then again on rallies rather than buying on dips. In other words, this chart highlights how traders rely on charts to determine order placement. By using technical analysis it was possible to forecast the rallies toward the resistance near 1.20 and the resulting pullbacks.

 

Always Pair Strong With Weak

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