Chicken or egg? Should the traders engage in fundamental or technical analysis? Which one is the most important? The answer is no brainer: both. Even if you are scalping the tiniest movements of market, having some basics of the fundamentals can lead to improvements of your strategies that effectively alter the game.
At the very least, fundamentals are vital because they may affect regulation, which has an effect on all traders irrespectively their trading plan. They need to be aware of regulatory changes and corrections that inherently alter the game of trading. Therefore, they will certainly profit from monitoring certain fundamentals.
For the trend-following traders who are not intraday players but rather hold long positions for days, weeks, or months at a time, being good in both fundamentals and technicals is crucial.
Some practical advices below are applicable to any type of trading but especially for the swing and position traders.
Fundamentals predict the direction of the currency markets. Technicals can then be employed to evaluate the time frame and the appropriate risk. Put the two together and, hypothetically , you have a winning trading plan.
Supply and Demand
At the heart of both fundamental and technical analysis is supply and demand. When the pressure of demand is strong with regard to the actual supply, price serves to settle the disparity by going higher.To control this using fundamental analysis, forex traders have to watch budget balances (surpluses and deficits), trade balances, and monetary policy.
Budget and Trade Balances
If a nation is running twin deficits that is a budget deficit under which the government spends more than it takes in a trade deficit, in which imports are greater than exports - the fundamental analysis predicts currency weakness and capital flowing out of the country.
Continuous deficits increase the possibility that the debt will be monetized, namely the central bank of this country will print money and loan it to the government in case if the private sector does not lend money to the government in question. The trade deficits indicate that the country is importing more than it is exporting, and thus is logically selling more of its own currency to buy in other countries. This has the result of declining the currency's value.
On the supply side is the strategy of the central bank of this country. Is it basically inflationary, meaning it will do what is needed to push prices higher? This policy is particularly important. The central banks can push prices higher if their plan is to print more money and spend it accordingly.
Part of this equation is the reason why forex traders avoid fundamental analysis. It is because it seems like information overload. Besides the traders believe in the Dow’s “market knows everything”- principle.
To avoid collecting huge data traders can focus on just those aforementioned points, namely, budget balances, trade balances, and monetary policy. All of this information is regularly reported by both conventional media and official bureaus. You may simply pay no attention to the other fundamental info so that you are able to easily concentrate on the data that matters.
Forex traders focusing on technical analysis are also prone to over analysis, and the answer is the same: focus only on the technical features that matter. Remember that there are an infinite variety of technical methods that can work. However, the methods below seems to be the most important.
Support and Resistance
Anywhere you can draw a horizontal line that indicates a region where price tends to bounce off. It is a important position from which you can start trading. This does not need to be too complicated. Simply find the zones that stick out. They are your support and resistance levels. When the market reaches them, the odds favor a reversal similar to what has already happened.
The 200 Exponential Moving Average
Many traders think that the 200 EMA is one of the most effective indicators. For whatever cause. Perhaps it is monitored by many institutional funds. Many believe that it has become somewhat of a self-fulfilling prophecy. Note that the 200 EMA behaves similar to support and resistance levels, in other words, the price tends to reverse or consolidate when it arrives at there.
Perhaps the area that requires more is that of candlesticks. Mastering them to the point where you can recognize them automatically, will greatly benefit you in feeling the psychology of the market and the fight between bulls and bears. That said, candlestick patterns are context sensitive. Therefore, trading with them must be combined with other techniques.
This is a crucial factor. When we see the support and resistance signal with a reversal candlestick pattern and/or the 200 EMA, it takes on greater significance. In general, the more technical indicators telling you the same thing, the higher is the probability that the trade will work as you expect.
The exits crucially depend on the prescribed reward/risk ratio. Many traders prefer to place them stop loss between the support zone. They enter at and the next one below it. It is efficient in reducing the times when they get taken out due to price spikes. The most acceptable ratio of the reward/risk is 3:1, sometimes greater. If there is a resistance zone that is far away and achievable in light of the fundamentals.
Forex trading does not need to be complicated. The most efficient solutions are simple. Moreover, the fundamental and technical analysis are not contradictory.
If the traders focus on the key elements of each, and make sure that the two techniques are combined correctly to complement one another, they can expect a remarkable rise of their trading profits.