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.
0 comments:
Post a Comment