Technical Analysis is based on the price action and relies on charts for decision making. Technical Analysis has certain assumptions. First, all the information related to the price is already contained in the price itself. In other words, all the information existent at the time the price came to an understanding has been already taken into consideration for that price. Secondly they believe price moves in trends, up, down or sideways. Third they believe that history repeats itself, so past market conditions that created certain price actions, should create the same price action if the conditions repeat again. The meaning is that patterns can be found that lead to same results most of the time the same pattern is encountered.
On the other hand, Fundamental Analysis tries to understand the reasons behind the price movements. They believe that economic indicators are the reason why the price behaves in a certain way and not in another. They believe in the offer-demand relationship and that money will flow to the place where the investors will receive the most returns.
Now, you have an idea about these two philosophies about the markets. Before you make a decision, let me tell you it is not a matter of taste or coolness. This decision will define your success or your failure and for that reason you need to know other issues that will affect your point of view about this matter.
Let's start with the Technical Analysis assumption about information contained in the price itself. Yes, it is certain that the price discount all new information regarding that price because time moves in one direction. If at 8:00 am the Euro was trading at 1.3500 USD and at 8:05 am some big mouth in the Deutsche Bundesbank make a comment about Germany leaving the Eurozone and going back to the Deutschmark, I guarantee you there will be a huge price action in the market.
Now ask yourself, how can any past price pattern account for something like that? See the following EUR/USD chart that reflect the instant when Ben Bernanke made the announcement on June 19, 2013 that the Federal Reserve could soon start cutting back its massive bond-buying program (purchasing US debt with "funny money" at a rate of $85 billion per month). The EURUSD pair dropped by a whopping 265 pips.
Imagine you were watching your computer screen on that day and your technical indicators predicted the rate of USD could go up against the Euro. You entered the market and went long that day. If you did that you probably are licking your wounds right now and wondering what went wrong.
Could the Fundamental Analysis have been able to predict what happened? Absolutely yes, printing money out of thin air only makes your currency weaker and the people savings and 401k are worth less and less. The Federal Reserve knew that at some point they have to stop printing or cutting back the amount of debt they were buying with funny money. That was Economics 101 and any fundamentalist will tell you it was unsustainable and it had to end sooner or later.
We live in the era of the Internet. The huge amount of information we receive at any instant will be molding our actions. New information is arriving at any time that will affect not only the financial world but our own little personal space as well. Understanding the causes of market actions will allow you to know when a market condition is no longer sustained by its fundamental causes and act accordingly. The main disadvantage of Fundamental Analysis is its complexity and the huge amount of information that needs to be analyzed in order to comprehend the markets.
Technical Analysis has its advantages. It is easy to understand since you are dealing with only four variables: opening, closing, maximum and minimum prices. Volume is not very useful in Forex trading because the market is not centralized and it is impossible to get instant data of all market makers. Even price at the shortest time frames is different from broker to broker. As a matter of fact, some seasoned traders believe that price action shorter than fifteen minutes time frame is generated by the brokers. That is a disadvantage of Technical Analysis. For shorter timeframes, some prices are artificially generated just to take out your stop loss and put you out of the position, it is not really market behavior but broker greed.
Some brokers display a Volume, but it is not the same Volume as in the Stock Market. It is not the number of shares or lots transacted for that timeframe as you could think, it could be the Volume for your broker but not what you were expecting. So, Technical Analysis takes those four variables and puts them in a chart or calculates some averages on the price, but that's it, it is the same information displayed in thousands of different ways.
However at the time to pick the best entry point for a position, nothing works better than Technical Analysis. Using those charts and their technical indicators you could be able to find the optimal level to enter or leave the market.
Fundamental Analysis works better on longer time frames, the closer you get to the tick data, the more unreliable Fundamental Analysis become. At shorter times frames Technical Analysis is better. Finding the best entry point to a position is done better with Technical Analysis.
If you ask a car racer what is better, stick or automatic, he will answer stick. If you ask an 80 years old guy he will answer automatic or even better, a limousine with a chauffeur. Everything depends on your own situation. In order to protect the trading capital traders use money management. A good idea is to limit the risk based on the size of your trading account. So, if you have a small trading capital, you probably will never be able to trade in timeframes with high price swings. The longer the time frame the bigger the swings in price. So, you might be unable to apply some fundamentals to your trades and be limited to use Technical Analysis. Always use strict money management rules. Remember you have no control on the price action, but you have 100% control on your own trades. The size of the position and the number of lots to trade are your only certainty in this business.
At this point you might be wondering which one is the best. The answer is… BOTH. Use the best of both, never trade against the fundamentals and use the Technical indicators for spotting the better entry and exit points.