Forex Trading: Fundamental versus Technical Analysis

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 -- what is important is the market's reaction to that data. 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.

by Eugene Ng -

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