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About Me

Darren Winters is a self made investment multi-millionaire and successful entrepreneur. Amongst
his many businesses he owns the number 1 investment training company in the UK and Europe.
This company provides training courses in stock market, forex and property investing and since
the year 2000 has successfully trained over 250,000 people.

Wednesday, 30 April 2014

Trading Forex Fundamentally or Technically, The Battle goes On

The Fundamental vs. the Technical Trader in Forex

In this article I'll take a look at trading forex from two distinct perspectives, i.e. that of the trader who favours the fundamental approach, and that of the trader who prefers the technical method.

Trading on the fundamentals

There's no doubt in my mind that fundamental data can move currencies, but what are fundamentals? In forex they consist primarily of news events and economic data.  A good current example of a news event affecting currencies is the Ukraine crisis. As the tension in the area ratcheted up a few days ago the US dollar strengthened against the Rouble. Should tension ease in the near future, we might expect to see a reversal. To a certain extent news and economic indicators tend to overlap. A change in interest rates is both economically significant and newsworthy.

So apart from keeping up with the news generally and assessing its impact, the fundamentalist also keeps an eye on the economic changes affecting the currency pairs he or she is trading. The easiest way to do this is to consult an economic calendar. These are readily available online, and give the trader a list of events that could impact currencies day by day. Examples include a change in the consumer price index, gross domestic product figures, a speech by the Chair of the Federal Reserve, or the big one in the US - nonfarm payrolls. This measure of all people on the payrolls of non-agricultural businesses can have a major impact on all US dollar paired currencies. It comes out on the first Friday of the month (so this Friday, May 2nd).

A fundamental trader would check the calendar, and depending on his or her expectation against a particular event or events, set up a trade. A surprise result of that particular event could spark a market reaction that kicks the currency either up or down. This could signal the beginning of a trend, but regardless of that it is an opportunity for profit. This is a relatively short term example though. For the longer term a fundamentalist might consult newspapers and financial magazines like the Economist, to form an opinion about a longer term position. Longer term fundamentals that might affect a trader's bias include the Bank of Japan's declared intention to weaken the Yen, and the Swiss Central Bank's pegging of the franc to the Euro (not allowing the franc to exceed SFr1.20 to 1 euro). If you're taking a position and intend to be there for months, then the day to day fluctuations are of less importance to you (this is not an excuse to ignore them completely of course).

So in nutshell, if you're a fundamental trader you're making your decisions based on news and economic data, either as it unfolds or is predicted to unfold.

Technical Trading

A technical trader studies price movement on a chart. As far as he / she is concerned the fundamentals are already incorporated in the price they're looking at, based on the premise that by the time you've heard the news the market has already reacted.

The charts consist of bars showing price variation in a given period. The bars form patterns, which can be interpreted in a number of ways. A stream of bars in an upward direction can be interpreted as a trend. If you're a trend trader this could be a signal to go long (buy), or if the bars are going the other way, go short (sell). The configuration of a chart varies by timeframe. You might have a clear uptrend on a daily chart, but when you go down to an hourly version the price action may be going sideways or downwards. The daily (or higher) chart is your focus to determine the bigger picture of price movement, but if you're trading on an intra-day basis you'll be most likely using lower timeframes like 5, 15, or 60 minute charts to determine where you enter the market.

The bars and their movements over time are complemented by a seemingly endless supply of technical indicators to assist your decision making. The MACD indicator, for example, shows the direction in price based on an algorithm performed on moving averages and their convergence or divergence with price movement. The trader can use this to determine when a change in direction (divergence) might occur, or to confirm the current direction (convergence). This represents one of many indicators that you might choose to use as part of your trading system.

Most technical traders have a set of rules that determine whether they enter a trade or reject a potential trade setup. You might be a trend trader, or a band trader, or you could trade breakouts of lines of support and resistance. There is even an argument for entering the market randomly. The particular style of trading is chosen because you believe it gives you an edge, i.e. a high probability of being successful. Your rules should include knowing how much you're going to risk, and when you're going to get out of a trade, either because you hit a pre-determined level of profit, or because you lost a pre-determined amount of capital risked. Once you have all that figured out all you need to do when the opportunity arises is to execute your trade flawlessly (meaning you don't break your rules!)

To the technical trader the charts represent a simpler and more successful way to trade the markets. The charts are a purer view of market reaction to all the data available at a point in time, and hence a more accurate reflection of what's really going on.

Fundamental or Technical?

Traders have been successful using both methods. Some of this could be attributed to personality - certain people prefer a longer term approach and are comfortable using a bigger picture fundamental method of decision making. Others thrive in the excitement of a fast moving daily market, using charts to place several trades in the course of a day, or are just convinced that the charts are more accurate determiners of where the market is going next, regardless of how often they place trades.

And then there is the argument for combining elements of each: - fundamental analysis to get a feel of longer term direction. combined with technical analysis to determine the best time to take advantage of that direction. You pays your money, you takes your choice.

 Darren Winters


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