There is a continuous debate among Forex traders about the use fundamental and technical analysis. Some prefer to use exclusively technical analysis and ignore the economic indicators. Other traders say that you can trade profitably only on fundamentals. In my opinion both types of analysis are equally important.
Simply speaking the difference between fundamental and technical analysis is that fundamental analysis studies the impact of economy and politic on currency value while technical analysis studies the chart patterns in effort to predict the price movement.
I think at the very basic level of understanding it is clear for everyone that a nation’s economic status will have an effect on the value of that nation’s currency. A good economy results in strong currency, just as a company’s stocks will rise in value when that company is doing well.
If you’ve been in Forex for any length of time you probably already know that when you look at the price charts at the times of important economic news releases, you will see increased volatility. These kind of news include Gross Domestic Product, trade balance, interest rates, payroll employment, etc. Most of these news have predetermined days of release so you can schedule your trading accordingly if you want to take advantage of volatility of those times.
An important thing for a trader is to keep track of when these reports are due, not only in your own country but in all of the countries whose currencies you regularly trade. It is not enough to rely on national newspapers and television for this. They do not give international economic news at a sufficiently detailed level. Therefore you need special economic publications. Many traders use the internet for this purpose this days.
However it is not only those fundamental economic news that impact the currency values. Political events and social forces also have significant influence on national currency. Examples of such events can be elections, social disturbances or even natural disasters can introduce high volatility into Forex market.
Often it is hard to predict what would be the market behavior at the time of such events. But you can still base your trades on movements that happens after those releases that are still have momentum but more predictable. The only thing you need to keep in mind is to test your system on history of such events.
If you decide to use a system that utilizes these fundamental indicators you need to be familiar with their impact on the currency prices. What’s more you have to be a person who enjoys to follow the news in economy an politics.
You may think that if you use only chart patterns and technical indicators in your trading you don’t need to know anything about fundamentals. I would disagree with that since the knowledge of the fundamental indicators and their schedule will allow you to adjust your trading system to make you more profit in the long run.
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