Fundamental analysis
Fundamental analysis asks what a currency should be worth by looking at the things that drive demand for it. The most important is the interest rate its central bank sets and the market's expectation of where that rate is going, because money flows towards higher yields. Behind that sit the data the central bank watches: inflation, employment, growth, trade balances and government finances. Political risk, commodity prices for the currencies of exporting countries, and the flows of money into and out of a country's shares and bonds complete the picture.
Its strength is that it explains why a currency moves over months and years. Its weakness is timing: a currency can be undervalued on every measure for a long time before the market agrees, and a trader with a leveraged position cannot wait indefinitely. In practice retail fundamental traders concentrate on the calendar, positioning around scheduled releases and central bank meetings, which the economic indicators article covers.
Technical analysis
Technical analysis asks what the price is doing and assumes that the price already reflects everything known. It works from charts: the sequence of highs and lows that define a trend, the levels where price has repeatedly stopped and turned, called support and resistance, and the indicators calculated from price and volume, such as moving averages, oscillators and bands, that summarise momentum and range. A technical trader buys because the chart shows a pattern that has tended to precede a rise, not because the economy has improved.
Its strength is that it gives precise entries, stops and targets from the chart, which is exactly what position sizing needs. Its weakness is that the patterns are far less reliable than the books suggest, that many indicators say the same thing in different ways, and that no amount of chart study predicts a central bank surprise. The evidence that simple technical rules make money in currency markets is mixed at best.
How traders combine them
Most working traders use fundamentals to decide direction and technicals to decide timing: a view that the dollar should strengthen because rates are rising, expressed through a purchase at a level the chart identifies as support, with a stop below it. Others trade only the chart and use the calendar only to know when to stay out. The combination is not a rule; it is what tends to happen once a trader has been caught on the wrong side of a data release by a beautiful chart pattern.
What analysis cannot do
No method of analysis changes the arithmetic of costs and risk. A trader who is right about direction 55 percent of the time, which is very good, still loses if the losing trades are larger than the winning ones or if the spread eats the edge. Analysis is the part of trading that gets the attention; sizing, stops and costs are the part that decides the result. The risk-to-reward article makes the arithmetic explicit.
Educational content is general information and does not consider your objectives, financial situation or needs. Forex and CFD trading involves significant risk.