The Trading Forex Blog » Technical Analysis

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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Forex Trading Methods – Finding the right one – part 3

admin — Mon, 31 Aug 2009 00:27:05 +0000

Technical Analysis: In my last articles, I shared that for any Forex trading method to be considered, it must be first, a complete method, (Forex Trading Methods – Finding the right one – part 2 ) and second, it must teach specific risk management rules. Today’s article on how to find the right trading method for Forex trading revolves around Technical Analysis. I believe the best Forex trading methods are based on technical analysis, without being 100% mechanical or automated.

As you already are aware, there are two primary forces acting in the Forex markets: fundamental data, which include such indicators as balance of trade data, money supply, interest rates, economic and financial reports, etc.; and technical data, which include such indicators as moving averages, average directional movement, stochastics, etc.

So, why should a forex trading method be focused on technical indicators?

First, attempting to trade on fundamental data requires you to be available on a real-time bases at whatever hour of the day or night that the news impacts the markets, and, you must be able to act on that news before (predictive) or at the instant thousands of other forex traders do (reactive), otherwise, you will have missed your opportunity.

Trading on fundamentals, as well, is less about the actual data itself and more about the market’s reaction to that data.

Technical analysis, however, allows the trader more time to make a smart decision. Utilizing technical indicators means the fundamentals are already reflected in the price of the market at any given instant.

While this means you are working more often with slightly lagging indicators, the advantages to using a forex trading method based on technical analysis mean that you spend less time identifying potential trades and when you have identified a trend and look to enter a trade, you have much more data to support the trend’s existence than if you are simply trading on the ‘news’.

Furthermore, by using technical analysis and applying it through a trading method, you can trade the markets on your own terms, when you want to trade and how you want to trade them, without needing to grasp the minute details of what fundamental reports ‘really’ mean.

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Forex Trading Methods – Finding the right one – part 4 End of day trading: In my last articles, I shared...