Technical Analysis vs Fundamental Analysis: A EURGBP Case Study

Technical and fundamental analysis are regarded by many as opposites. One revolves around charts and figures, the other financial statements and macroeconomic news. Staunch advocates for a single approach to the markets will insist on fundamental analysis’ superiority over technical analysis, or vice versa. However a combination of both approaches can help traders develop a well-rounded view of the markets – especially when trading in volatile conditions. In this article, FXTM Staff Writer Natasha Keary takes a look at the roles of technical and fundamental analysis using a EURGBP currency pair case study.

This study comes courtesy of FXTM Invest – a copy trading programme which allows investors to copy the trades of established forex traders, or ‘Strategy Managers’. The Top Ranking Strategy Managers page on the FXTM website helpfully provides a wealth of information about top Strategy Managers, including their maximum drawdown, profitability, risk level, and return percentage. The list is designed to help traders choose a Strategy Manager who meets their preferred trading style and characteristics – however it also provides evidence of effective trading strategies in action.

A particularly prolific FXTM Strategy Manager trades under the nickname ‘OnePlus87’. OnePlus87 traded the EURGBP currency pair during the volatile market months in October and September, and received a profitable outcome. Using the data from their Strategy Manager page, focusing particularly on the ‘Trading Review’ tab, we can examine the ways in which they combined technical and fundamental analysis to yield successful trades.

EURGBP: an outlook

Throughout September and October so far, the EURGBP pair has been thwarted by major political events including Brexit and the Italian national budget. Following the Brexit deal negotiations in Salzburg, the EURGBP performed an upward swing on the price charts, rising 1.2% – from 0.88 to just under 0.90. After suffering its heaviest sell-off of 2018 at the end of September, the Pound found resilience despite misery from failing Brexit negotiations, as investors wait for further news from the UK’s Prime Minister Theresa May. Either way, July-September has been the strongest quarter economically for the UK so far, with 0.7% GDP growth.

For the Euro, the upcoming Italian budget for 2019 has been throwing the markets into turmoil. The Italian government’s targets for the deficit and debt of the country violated EU rules, and resulted in negative feedback from Brussels. At present, the currency pair has fallen almost 3% since the Brexit negotiations in Salzburg. The Euro has seen increasing investor caution, as many fear the dispute with the EU is far from over – and could even reignite fears of the so called ‘Italeave’.

Against this background, fundamental analysis reveals that there may be further perils ahead for EURGBP with further Brexit announcements and the submission of the Italian budget on 15 October.  Technical analysis reveals that the Pound’s prospects may be on the rise – but what’s the best market move to make against this background?

OnePlus87’s strategy

Let’s take a look at how OnePlus87 adapted to these market conditions. The Trading Review tab on the Strategy Manager page reveals OnePlus87’s positions during September and October. In these months, OnePlus87 kept their positions open for long periods of time, selling when they finally decided to close. By holding long-term positions, OnePlus87 was eventually able to profit from the volatility surrounding the EURGBP.

That is to say that instead of flinching at Brexit headlines, OnePlus87 held their nerve and used wider economic data to reassure themselves of their position.  They utilised technical indicators to analyse price charts, discovering historical highs and lows of 0.98 and 0.65 respectively. These helped them calculate their potential risk as verging on 0.98 at most – a level which might be reached in the case of a no-deal Brexit. The downward reward, they calculated, was therefore potentially very lucrative.

Based on previous experience, OnePlus87 postulated that negative Brexit headlines would also affect the Euro – the effects of which would potentially not last very long. As a result, by holding on to a position for long periods of time, this Strategy Manager was able to go short and make a profit on EURGBP.

So what does this tell us? Undoubtedly, OnePlus87 used both fundamental and technical analysis to inform their trading strategy. Their positions prevailed by withstanding the small market movements and being informed by both technical and fundamental perspectives. Along with the well-known trading practise of keeping a cool and level-head, a combination of both approaches helped OnePlus87 make a profitable trade in these volatile months (past performance does not guarantee future returns).

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Please note that the above article describes a specific example of how a trader made a profit in the financial markets using a combination of fundamental and technical analysis. It is important to remember that the markets are always unpredictable and you have an equal chance of making a loss if market movements do not go according to your plan. It’s crucial to always keep this risk factor in mind.

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