Traders use a variety of strategies in the markets, all based on two forms of analysis: Fundamental analysis and technical analysis. Although institutions and other large traders often use a combination of these two analytical styles, most independent traders rely on strategies based largely on technical analysis.
Let’s take a look at both analytical styles as they apply to trading forex.
In the stock markets, equities traders are sometimes able to value a company (and therefore predict its share price) if they know all the information about that company. That’s because the share price of the company reflects the value of its known assets. By knowing a company, the equity trader knows what its share price should be.
However, in forex markets using fundamental analysis alone is far less effective, because it’s extremely difficult to value an entire country’s economy in order to predict its currency’s value. Most forex traders use exclusively technical analysis.
When full scale fundamental analysis is applied to forex markets, it’s most often used as a way to predict longer-term trends. And, some traders use data such as news releases in the short term to generate trades or confirm signals. So, along with their mainstay technical analysis, some traders incorporate fundamental data.
Here are some of the fundamental indicators commonly used by forex traders:
★ Non-Farm Payroll
★ Consumer Price Index (CPI)
★ Purchasing Managers Index (PMI)
★ Durable Goods Sales
★ Retail Sales
For best results, savvy traders also pay attention to various meetings of government officials and industry conferences, and other venues where market-moving quotes and commentary can be found.
Meetings are scheduled to discuss inflation, interest rates and other issues that directly affect currency prices. These meetings and conferences are often reported in the industry press before they reach mainstream media. The important event for fundamentals-based forex traders is the Federal Open Market Committee (FOMC) press conference and meeting transcript.
Forex traders can follow meetings and conferences and become highly knowledgeable specialists, and profit by knowing a particular market better than most others.
Technical analysis is by far the most common basis for forex strategies. Using technical analysis in forex is different than in equities, because the forex time frame is 24 hours worldwide whereas many stocks don’t trade overnight, so their price movements are different.
Traders use a huge variety of individualized systems, often built by knowledgeable EA providers, with many different indicators. Here are just a few of the most common indicators and theories used in technical analysis:
★ Elliott Waves
★ Gann Theory
Traders craft many different strategies based on technical analysis, especially by combining multiple indicators. Other developers create trading systems based on finding historical buying and selling patterns that are expected to be repeated.
Developing a personal strategy
Successful forex traders develop and fine-tune their strategies over time. Some traders focus on a particular tool or calculation, while others user a broader approach and experiment with a combination of technical and fundamental analysis.
Many new traders wisely start out by “paper trading” or using a demo account with a forex broker. And, experienced traders almost invariably develop new systems with backtesting before trying them in real time. Lack of experience can cause you to lose your capital, so it’s important to take the time to practice before committing significant money to any new trading system.
Regardless of whether you use technical indicators alone, or incorporate fundamentals as well, if you have the discipline to learn your target markets and trade confidently while carefully managing risks, then your strategy has an excellent chance to succeed.
Do you rely on technical indicators? Fundamental indicators? Or, a combination of both?