So our answer to the question is to use both. We know all too well that both 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.
For example, one of the biggest stories of 2005 was the U.S. Federal Reserve’s aggressive interest rate tightening cycle. In the middle of 2004, the Federal Reserve began increasing interest rates by quarter-point increments. They let the market know very early on that they were going to be engaging in a long period of tightening, and as promised, they increased interest rates by 200 basis points in 2005.
This policy created an extremely dollar-bullish environment in the market that lasted for the entire year. Against the Japanese Yen, whose central bank held rates steady at zero throughout 2005, the dollar appreciated 19% from its lowest to highest levels. USD/JPY was in a very strong uptrend throughout the year, but even so, there were plenty of retraces along the way. These pullbacks were perfect opportunities for traders to combine technicals with fundamentals to enter the trade at an opportune moment. Fundamentally, we knew that we were in a very dollar-positive environment; therefore technically, we looked for opportunities to buy on dips rather than sell on rallies.
A perfect example was the rally from 101.70 to 113.70. The retracement paused right at the 38.2% Fibonacci support, which would have been a great entry point and a clear example of a trade that was based upon fundamentals but looked for entry and exit points based upon technicals. In the USD/JPY trade, trying to pick tops or bottoms during that time would have been difficult. However, with the bull trend so dominant, the far easier and smarter trade was to look for technical opportunities to go with the fundamental theme and trading with the market trend rather than to trying to fade it.
Read More : Trigger Fundamentally, Enter and Exit Technically
