Forex Trading: Fundamental versus Technical Analysis

admin — Fri, 04 Sep 2009 18:21:45 +0000

Forex traders have today a wealth of information from which to evaluate and select potential trades (some would argue too much information). These markets are moved by two primary forces: Fundamental forces (balance of trade data, money supply, interest rates, economic and financial reports, etc.) and Technical forces.

While many traders advocate fundamental analysis-based trading, it should be argued that this style of trading is very difficult especially for people who have little time to trade (less than an hour a day), or who are new to trading Forex.

Fundamental analysis traders tend to be ‘always on’ — or, day trading because it requires PRECISE timing to move with the markets. If you can’t get to your trading platform the minute a ’surprise’ report hits the newswire, you’ll be too far behind the action to respond to it.

That’s because the markets are always taking in new financial and economic information from around the globe — and they are continuously reacting to it to the minute.

Trading on Fundamental Analysis means understanding that the underlying data is NOT important — the market’s reaction to that data is important. Remember that most fundamental data is ‘projected’ – the actual release of fundamental news only acts to confirm or change those projections. Thus the ‘timing’ of fundamental analysis if of greater importance and leads to shorter term profits or loss due to the swing in market reaction.

Trading on Technical Analysis, however, gives you maneuverability in the markets. Technical Analysis is designed to reflect fundamental analysis in the current market price — in other words, the market is doing the fundamental work for you. What you are doing is riding a trend based on the trend meeting certain criteria (known as conditions).

Technical Analysis will allow you to identify, confirm and enter a trend with enough time in the trend to generate profit potential. Technical Analysis will also identify, confirm and help you exit a trend that has run its course. In both cases, the action of the price in the Forex markets will dictate what moves you will make.

Thus, using a good trading method based on technical analysis is a less demanding way to trade Forex with far greater odds of success.

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Evaluating a Forex Trading Method

admin — Thu, 03 Sep 2009 20:16:13 +0000

One of the questions I’m often asked is what constitutes a good trading method (or how do I know if a trading method is really worth buying). In this article, I’ll show you what most methods look like (and why they are bad) and show you a simple way to evaluate a trading method.

If you take a close look at most of the so-called Forex trading methods and systems on the market, they consistently share the same shortcomings:

They are incomplete. Too many courses teach hours of ‘in theory’ — but spend little to no time teaching a step-by-step plan to help you trade.
They don’t include risk management. This is the number one mistake most traders make — not managing risk in their trades. If the system or method you’re considering doesn’t teach risk management consistent with their method, you would do well to walk away from it.
They focus strictly on fundamental analysis. Methods that focus only on fundamental analysis are incredibly time consuming and subjective and require much deeper understanding of more complex economic and financial issues. If you don’t understand them, you won’t succeed with such methods.
They require you to “day trade”. Many of the methods and systems I’ve seen require you to be in front of your computer nearly 24/7 to be able to ‘react’. Reality should tell you how impossible this is.

What constitutes a “good” method?

Based on the methods and systems I’ve seen over the last several years, I’ve created a simple 4-part measurement that I use to determine if a trading method is good for me:

The method must be complete and teach the setup conditions, entry rules, initial stop rules and exit strategy rules while leaving no decision to chance.
The method must teach and include specific guidelines for risk management and money management in accordance with its method.
The method must utilize technical analysis, but it cannot be a completely mechanical or automated system.
The method must be practical in terms of time spent applying it: I favor methods that only require 20-40 minutes a day.

The steps above have helped immensely in weeding out the ‘pretenders’ among trading methods and focusing only on the ‘contenders’. Methods which provide thorough explanation of how to apply, protect and trade the methods are the only types you should use in your trading.

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The Trading Forex Blog » fundamental analysis

Forex Trading: Fundamental versus Technical Analysis

Evaluating a Forex Trading Method