Combining Fundamental and Technical Analysis for Successful Trading
Hi there. In this article, I’m going to show you how to combine fundamental analysis and technical analysis. Now before we begin, imagine trying to mow your lawn with a pair of scissors. You’re obviously going to struggle because a pair of scissors is not designed to cut large areas of grass. You would need a lawnmower to cut large areas of grass.
In the same way, combining technical and fundamental analysis requires using each method as intended. So in other words, if you’re cutting paper, you use a pair of scissors. If you’re cutting the lawn, you use a lawnmower. Understanding the right tools for the right job is crucial for success.
Fundamental Analysis
Fundamental analysis involves evaluating a variety of different factors. Key elements include:
- Macroeconomic Landscape: This includes geopolitical events, overall market sentiment, GDP growth rates, employment figures, inflation, and retail sales data. These factors impact the strength and weakness of currencies.
- Central Bank Policies: Interest rate decisions, quantitative easing measures, and central bank communications heavily influence currency movements.
- For example, when a central bank raises interest rates, it often strengthens the currency due to higher returns on investments denominated in that currency. Conversely, quantitative easing, which increases the money supply, can weaken a currency.
- Political Stability: Elections, policy changes, and political turmoil can significantly impact currencies, affecting investor sentiment and market behavior.
- Market Sentiment: General risk sentiment and specific market moods influence trading decisions.
- For example, during geopolitical risks, traders might seek safe havens like gold, the yen, or the Swiss franc.
- Intermarket Analysis: Developments in the bond, equity, and commodity markets can impact currencies.
- For instance, rising iron ore prices can support the Australian dollar.
Understanding these drivers helps determine which currencies are likely to strengthen or weaken, providing a fundamental bias for trades.
Resources for Fundamental Analysis
There are numerous resources available for fundamental analysis. Notable ones include:
- Reuters
- Bloomberg: Offers a subscription with excellent intraday sentiment analysis.
- FXStreet: Provides good news and analysis with free institutional research.
- Forex Live: Known for breaking news, although it contains many ads.
Yahoo Finance and The Wall Street Journal: Additional sources for comprehensive information.
Technical Analysis
Once you have a clear fundamental bias, technical analysis helps pinpoint entry and exit points. Here are three key technical tools:
- Support and Resistance Levels: These levels indicate potential reversal points. For instance, a previous resistance level might become a new support level.
- Trend Line Breaks: Drawing trend lines across swing points can highlight potential breakouts. A valid trend line often requires at least three key swing points.
Relative Strength Index (RSI): RSI indicates overbought or oversold conditions, helping traders identify potential retracement points.
Practical Example
Consider gold trading. With a clear fundamental bias due to falling dollar and yields, technical analysis can identify specific entry points. For instance, a resistance level at $2,450 could be a target for buyers. Similarly, moving averages can act as dynamic support or resistance levels.
Integrating fundamental and technical analysis creates a robust trading strategy. Fundamentals tell you what to buy, while technicals indicate when and where to buy. This approach enhances your conviction and helps manage risk.
Combining Fundamentals and Technicals
Integrating fundamental and technical analysis creates a robust trading strategy that leverages the strengths of both, leading to higher probability trades. Technicals can help limit risk by finding clear turning points, and if the market doesn’t move as expected, you can exit the trade.
For example, I recently looked at the Aussie-New Zealand dollar. A strong CPI print out of Australia supported the Aussie against the New Zealand dollar, and a dovish tilt from the Reserve Bank of New Zealand further strengthened this view. I looked for pullbacks from a symmetrical triangle pattern and used daily pivot points and inside bar patterns to identify entry points. This approach, combining fundamental drivers with technical setups, provided a clear trading strategy.
Education and Training
To master these skills, consider educational resources like macroeconomic courses, which cover topics such as economic indicators, central bank policies, and intermarket relationships. Practical training sessions, risk events trading strategies, and custom reports can further enhance your understanding and application of these concepts.
For example, our flagship accelerator course goes through the skills needed to develop a solid understanding of fundamentals. The Macro Fundamental Masterclass includes over 130 hours of content and 90 videos, covering everything from economic indicators to central bank policies and intermarket relationships. We also offer live sessions twice a day, covering upcoming risk events and how to apply technical analysis in real-time.
By integrating fundamentals and technicals, you’re essentially creating a robust trading strategy that leverages the strength of both, leading to higher probability trades. Technicals can help you limit risk and find clear turning points where you can enter or exit trades. Combining both methods allows traders to adapt to changing market conditions and make well-informed decisions, ultimately increasing their chances of success.
Communicating how this works is what we’ve spent thousands of hours doing and continue to do week by week. I hope you can see the benefit of this approach. If you need assistance with your macro fundamental trading and would like to learn more about combining fundamentals and technicals, we are well-positioned to help you do that.
Watch the video above for a detailed walkthrough and visual examples.