In Currency Trading there exists a strong a debate on technical and fundamental analysis and their usage. Most traders have argued that market forces respond more to technical analysis than fundamentals, while some others believe fundamentals to be of more importance. To be a successful Currency trader you must know how to strike a balance between the two methods of market analysis.
Technical analysis comprises of the collection of historical price movement data to help predict the direction of currency price. While fundamental analysis focuses more on the economic news, political stability and other dribs and drabs of news that will suggest either a strengthening or weakening of the economy in general.
Currency trading should involve both methods of analysis in my opinion for the following reasons:
• Since most currency traders use charts and indicators you will find that often times the market always experiences a deviation at the most common support and resistance levels. When the same support and resistance is been looked at by thousands of traders, there is bound to be a fluctuation in price once it hits that point of support or resistance. This is purely as a result of the limit or stop orders that must have been placed at these levels.
• Universally recognised chart patterns such as “head and shoulders” are technical indicators of a reversal which once it forms on a chart signals a reversal. When this happens there is up to a 75% chance of a reversal because yet again many traders are watching for this.
• Currency trading responds sharply to fundamentals such as “interest rate”. When there is a cut or an increase in the interest rate, the currency directly related experiences either a drop in value or an increase in value against paired currencies. So in this case, a currency trader who blindly sticks to his technical charts without putting into consideration the effects of such news release will be badly burnt.
• Fundamentals analysis have always been known to move Currency Trading market in the short term, while technical analysis is more of a long term price indicator. Understanding this will help you to know when to double up an existing trade or downsize to avoid more drawdown than your account can possibly handle. An example of this scenario goes thus: You purchased 1 lot of the GBP/USD yesterday. Today there is a news release that the United States Federal Reserve has dropped the interest rate by quarter of a point. Knowing that the USD is most likely to experience a weakness, you quickly double up 1 lot which stays open for a few days before you take profit and run.
So in Currency Trading technical analysis is considered of critical importance as is fundamentals. Although it can be a lot of work following the economic news of every single currency you are trading, it is therefore important to stick to a few currency pairs and then gradually spread out.
Most beginner currency traders find that the complexities of keeping up with both technical and fundamental analysis can be a daunting task if not properly planned. For a more effective use of both technical and fundamental analysis I suggest:
1. When inputting indicators in you chart make sure not use to more than 3 indicators with one overlay. 3 indicators can be; stochastic, MACD (moving average convergence and divergence) RSI (relative strength index). A good overlay to use with these is “Bollinger bands”. 2. Keep an economic calendar for the major currency pairs, and make sure to look over your calendar after your technical analysis to ascertain what news releases are expected
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