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Fundamental vs. Technical Analysis in Forex


The forex market has experienced enormous popularity in the past few years, thanks to technology and the flexibility offered by the genre for the average retail forex trader.  You can trade anytime and from anywhere, but success still depends on knowledge, experience, and emotional control, factors that impatient newcomers to this investment medium are loath to admit before they crash and burn.  Yes, casualty rates are high due to high risks, and specialized training is a must have from the get go.

For stock traders that wish to try their hand in this “greener pasture”, minor adjustments are necessary before committing real capital in the forex market.  A trader’s “best friends” continue to be fundamental and technical analysis, although a few nuances must be accommodated up front.

Fundamental Analysis

Stock traders tend to be deep in fundamental analysis skills related to financial statements, selected sector performance, and business cycle impacts.  In the forex world, the fundamentals are not so “isolated”.

  • Nearly anything and everything can make the markets move, some things more dramatically, but sensitivity to events is definitely moved up a notch. 
  • Currencies come in pairs and do not have “intrinsic” value. 
  • Traders invest in a “position” that has “relative” value, depending on the nature of the economic health or the currencies respective countries. 
  • Every position equates to a “long” in one and a “short” in the other. 
  • Bankruptcy is not a concern, especially for the major pairs connected with the Dollar, but cyclical waves occur more frequently.

Experienced traders soon recognize that they cannot compete on a fundamental data interpretation basis with large global banks and hedge funds that devote considerable resources to this activity.  One needs awareness of key data release calendars to prevent being blindsided by a sudden disruption in the market, and an intuitive capacity to understand how major fundamentals will impact the market.  The objective then becomes to join a potential trend and ride it for all it is worth, accepting that if the market reverses, then you act quickly to minimize the damage.

Technical Analysis

Technical tools take on a greater importance in this medium since both volatility and sudden directional changes create a rather chaotic trading environment.

  • Traders focus on a few favorite indicators and continually review a variety of timeframe snapshots to validate the certainty of a forceful trend, either up or down. 
  • Fibonacci retracement ratios take on a more surreal nature as consistent signifiers of support and resistance. 
  • Searching for high probability setups is facilitated by technical analysis as the only way to optimize both entries and exits in a very fickle market.
  • Understanding trader psychology also helps in recognizing some of the subtler forex gyrations.

Pricing movements in the forex market, however, do replicate wavelike patterns and often suggest a tendency that can be anticipated with experience.  Technical indicators and pattern recognition skills do easily transfer from other trading mediums, but a quicker and defter touch is the distinguishing characteristic.  The action is swift, and you can easily miss a major market move in the blink of an eye.

The Need for a Disciplined Approach

Due to the intensity of the currency markets, a successful trader must have a step-by-step trading plan that governs his every move before, during, and after a position is closed.  The plan must incorporate both fundamental and technical analytics, along with prudent risk and money management principles.  Lastly, invest the time necessary in practicing on a “free” demo system that trades virtual cash with real time quotes.  Fine-tuning your trading plan will pay dividends later when real capital is on the line.

Tom Cleveland is a writer and market analyst for Forextraders.com, an online resource for the foreign exchange market and currency news. With over 30 years of experience in global financial matters, Tom’s writing on business issues has appeared in the NY Daily News and BusinessInsider among others.

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