Fundamental analysis is the study of a nation’s economic data with an eye toward setting a value on its currency relative to those of other nations. For example, with the United States hovering on the cliff of a recession and its national debt deepening, the forex trading market has decided that the USD is worth not much more than its Canadian and Swiss counterparts while holding it just higher than the Australian dollar, despite the enormous disparity in the relative sizes of the economies under discussion.

Technical analysis, on the other hand, examines the movement of the price action within the forex trading market without assigning any values to it. For example, if the AUD is trending higher versus the USD, with the price action climbing above the five-day moving average and the RSI just above 50 with plenty of room before reaching the oversold level, the technical trader’s only concern is that a good trade is underway and there’s a profit to be taken off the table, not whether the two currencies are approaching parity in their economic fundamentals.

Neither is an exact science, and economists attempting to forecast market movements can be as gloriously wrong as the greenest technical trader; however, understanding and predicting trends within economic data is the result of years of study, and most forex traders prefer to work the market rather than learn about its underlying supports. For this reason, most so-called retail forex traders are technical traders.

Another reason for the dearth of fundamental traders is the requirement for on-the-spot information regarding a market that has no central location. While it is certainly true that economic data can be gleaned from governmental and industry reports, and that the Internet makes such gleaning an immediate event even if the reports are coming from the other side of the globe, the rumours and opinions that move the markets are not as readily available. As this “dealer chatter” proved powerful enough to cause the downfall of industry giant Bear Stearns, a fundamental trader not located within listening distance of this drumbeat is at a serious disadvantage.

Perhaps the most successful traders are those who implement some combination of the two systems, relying mainly on technical analysis of their favourite currency pairs’ charts yet keeping a weather eye on the economic announcements of all of the nations in question. Knowing, for example, that the May 2008 Australian labour market figures were to be released on Thursday 12 June at 11:30 AM Canberra time, and knowing that most economists forecast yet another decrease in the overall level of unemployment, these combination traders watched the Australian Bureau of Statistics’ website for the anticipated announcement and were therefore in an excellent position to short the AUD when the figure unexpectedly turned positive.

Such forewarning was particularly important because of the unexpectedness of the change in the data trend. On the one-hour chart, the AUD/NZD pair reversed direction without even forming a doji, and the AUD/JPY, which normally trades more on risk aversion and the carry trade than on fundamentals, nevertheless disconnected from that established pattern and also fell off the table with little warning.