Learn Forex: Technical vs. Fundamental Analysis Showdown and the Yen

DailyFX

For new traders coming into the Forex market there can seem to be a battle of fundamental vs. technical analysis of the market. You should combine both. When your views on the currency align based on fundamental and technical data that can be a good time to look for a trade entry.

Here is a breakdown of both types of study and forecast and how it relates to the currency pair of the month, the Japanese Yen.

Fundamental Analysis

Fundamental analysis looks at the underlying economic conditions of a financial instrument. It’s difficult to make trades strictly from a fundamental point of view. At the same time, it isn’t impossible. Most people who speculate from Fundamental data alone would call themselves investors or positions traders because there is no clear cut price-based exit point. Fundamental Analysis focuses around the Economic Calendar and Central Bank Announcements.

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By studying the pattern or trends in interest rates, jobless claims, and treasury yields to name a few, you can get a grasp on the overall health of the economy and potential direction the currency of the economy will move to next.

Fundamental Analysis and the JPY

From a Gross Domestic Product perspective, it is in the best interest of the Japanese economy to have the weakest Yen as reasonably possible. Because they are an export based economy, it only makes their goods more expensive to buy when other currencies fall against the Yen.

The Bank of Japan took a drastic step last month in weakening their currency in a manner never before displayed. JPY has been on a constant fight to weaken their currency and improve their economy without the success they sought. Last month, the Minister of Finance & Minister of State for Economic and Fiscal Policy all stated their commitment to weaken the currency and support their export based economy. Also, there is a big election coming up and the front runner, Shinzo Abe of the Liberal Democratic Party is running a Pro-Quantitative Easy campaign which weakens a currency by increasing the supply dramatically.

This economy gives the Fundamental Analyst a lot to chew on. Japan is the third largest economy in the world with a currency changing election coming up centered around economic policy.

Technical Analysis

The study of price action has become the mainstay of traders as the internet age has merged trading prices being recorded on charts in real time. Traders love technical analysis because of the argument that all news or fundamental analysis is priced into the chart. Price is also the best way to see the emotions and collective behavior behind price and price patterns.

It’s easier to make trading decisions in terms of entries and exits from price action and the historical behavior pattern of prior traders. Technical analysis brings in the actions of people who moves price. Because the people who trade and move prices don’t always act rationally, it’s beneficial to study patterns of past behavior.

Technical trading is like getting into the mind of the market to see what it may likely do next based on historical behavior as opposed to what it should do based on the news alone.

This also gives traders an unlimited of trading opportunities by studying different patterns across different time frames.

Technical Analysis and the JPY

The Japanese Yen has been on a historical bull run. This means that against every currency pair it trades against, they are all weakening in relation to the Japanese Yen over the last several years.

The USDJPY alone has seen a major move as have a lot of other common pairs against the JPY like the GPBJPY

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GBPJPY Monthly Chart:

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Many traders have put their hand on the hot stove of trying to buy the bottom of the Japanese Yen as it falls on the charts. There are green shoot that your attention should be glued to regarding this potential turn around.

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If we look at a daily chart, we can see that a multi-year down trend line has been broken. This means a little more than the 200 Day Moving Average because we have seen price break through that line multiple times only to break back down.

The key here is to look for price to start making higher highs and higher lows so that we can see a multi-year trend reversal forming.

It’s often said that one of the best places to be fashionably late but not too late is in trading. In essence you want the trend reversal to prove itself now that it has broken out of this triangle and downtrend.

Convergence of Technical & Fundamental Analysis

Traders don’t need to worry about whether Technical or Fundamental analysis is better. Rather, combine both to find a time when the fundamental and technical outlooks for a currency come together.

Fundamentally, we have a game changing election and coordinated front to weaken the Japanese currency that has in prior times only been focused on the Bank of Japan.

Technically, we see a multi-year trend line that has broken to the upside showing that the Yen is weakening. We recommend letting this move play out before getting into a position if you feel it is right for you.

Whether or not the trade is right for you, we always recommend appropriate trade size and risk management be utilized.

Happy Trading.

---Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@fxcm.com.

To be added to Tyler’s e-mail distribution list, please click here.

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