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Two methods to approach financial markets

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Fundamental analysis and technical analysis are two main methods to analyze financial markets in general and FX market in particular. Fundamental analysis focuses on economic and financial factors that influence a security. On the other hand, technical analysis focuses on chart of a security and uses past data to predict the future price movement. In this topic, we will take a look some differences between two methods.

Time Horizon


Fundamental analysis takes a long run to approach to investing while technical analysis takes a short term to medium term approach. Then fundamental investors often look at data multiple of years. They believe that a security is undervalued or overvalued in the short term, but in the long run the security will correct itself based on fundamental factors. On the other hand, technical investors often look at shorter time frame such as monthly chart, weekly chart, daily chart even hourly chart.

Basic Philosophy


Fundamental analysts try to determine an intrinsic value of a security. In stock market, they measure that value by discounting the value of future cash flows to present value. In FX market, they determine a currency pair traded overvalued or undervalued by accessing interest factors, monetary pocilies and economic data. A security price that trades below its intrinsic value is considered a good investment and vice versa. Technical analysts believe that the market discounts everything. All information is reflected on stock's price. Then there is no reason to analyse a company's financial statements. Hence, they only focus on chart itself and use past data to determine where the price may be headed.

Combination


Many debates occur regarding two methods. For example, some critics view technical analysis as unproven science. However, we can combine two methods to get better results in investing. For instance, an investor may use fundamental analysis to determine an undervalued security or an overvalued security. Then he may use technical analysis to find a specific entry and extit point. For example, an investor determines a currency pair in downtrend by using fundamental analysis, he may use technical to entry like chart below.