Part 4 Fundamental Analysis – 4 Steps to trade news releases

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Thread: How to trade based on Fundamentals? (part 2)

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How to trade based on Fundamentals? (part 2)

Here I am about to describe how I use fundamentals we get from forex calendar in my trading and how we can take advantage of news releases every week.

Probably all know about forex calendar and news so I am not gonna explain that in details, my aim here is to let people know how to trade fundamentals, what to look for and when exactly trade them.

So far I am not the most successful news trader definitely, I have some mistakes on regular basis but I am learning this and sometimes I can actually get some lovely pips from news releases.

First rule in news trading I’ve noticed and come up with: Do not speculate on pre-news because believe me there are many investors who do that and in case you are wrong on speculation, it is hard to get out of that trade in case there is surprise in that release to opposite direction.

Second what we should notice: Always look for release, do not trade it if you do not get any surprise at all, for example if Manufacturing PMI for pound was expected at 49.2 and it came at 49.2 look for market reaction, but likely there will be no at all mostly, so you might not want to be in that trade too.

If you trade one release like I mentioned the same manufacturing PMI, you should definitely pay attention to previous releases over at least 1-2 weeks period for pound because if there is down trend, bad releases, then market is likely to punish pound if there is even slight miss in that release.

I know many traders might ask what to do if there are like 10 releases for euro, what to know what we should trade, and what not.

First definitely look at which are more important, clearly French unemployment data will be less important than whole Eurozone data, so do not expect much of an action after first releases, wait for final numbers, wait for most important releases to come out. I’ve came up with losing trades only because I jumped in trade after market moved about 20 pips after release, but later we got more important release at much better numbers and obviously market gave up that dip and went even further up, I ended up with losing trade.
One great way how to trade news release is open 5 min chart on that pair you are looking to trade, wait for release and then look at chart, wait for 5 min candle to close, it will show you strength after that release and that could be very nice pointer of direction where that pair might head later. However this is important to understand that not always market keeps that strength or weakness, sometimes market is uncertain and then it is wise to use very tight stop loss to avoid any surprises.
About the take profit and stop loss targets. Stop loss for news trading should be tight, do not use like 50-60 pip stop loss, which is waste of money, no more than 30 pips I say. If you do not get any surprise in release, do not trade it because then market might be choppy and you might even lose that trade. However take profit target is where your technical analysis must step in, look at chart, look for any price points where market might find them hard to break, that is your first target. I am saying from my experience that about 100 pips that is maximum you might get from release in one day and that is only when volatility is extremely high, otherwise maybe 50 up to 80 pips on average basis could be good.

One big aspect we have in forex is all the meeting minutes, rate decisions, press conferences. This is which is most difficult part in forex, sometimes market can be very aggressive and volatile and extremely unpredictable too. I can’t explain exactly how to trade each press conference or mpc minutes right now, there I hope I can spend some time writing how to do best on some of these speeches if some members will want to know more

Right now that is all information I can share from theory, but if there are traders who really want to know more, I would be willing to explain more in details here because we have to take news releases and look at them separately, then that idea might be clearer to others

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Looking forward to questions and some qualitative advices, opinions only!

Last edited by dzin4aans; 02-26-2020 at 08:33 PM .

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Technical vs Fundamental Analysis in Forex

Understanding the differences between fundamental and technical analysis in forex trading

There is a great debate about which type of analysis is better for a trader. Is it better to be a fundamental trader or a technical trader? In this article we will explore what the difference is between these two types of traders and which pieces of information forex traders in particular tend to look at.

Technical vs fundamental analysis comparison

Technical Analysis Fundamental Analysis
Definition Forecast price movements using chart patterns Various economic data used to establish value/ target price
Data considered Price action (charts) Inflation, GDP, interest rates etc
Time horizon Short, medium and long term Medium and long term
Skillset required Chart analysis Economics & statistical analysis

Fundamental Analysis

Fundamental analysis involves assessing the economic well-being of a country, and by extension, the currency. It does not take into account currency price movements. Rather, fundamental forex traders will use data points to determine the strength of a particular currency.

A fundamental forex trader will analyze the country’s inflation, trade balance, gross domestic product , growth in jobs and even their central bank’s benchmark interest rate.

Below is an example of an economic calendar where fundamental traders will be able to keep up to date with the latest data releases. There are many data releases on any given day which is why traders should know how to filter the calendar to show relevant information only.

By assessing the relative trend of this and other data points, a trader is analyzing the relative health of the country’s economy and whether to trade the future movement of that country’s currency.

The table below summarizes the general effects that different economic data tends to have on the strength of a currency. However, this is not guaranteed as there are many factors that influence currency movements.

How economic data affects currencies

Expectations Effect on currency
Gross Domestic Product (GDP) Better than expected Positive
Consumer Price Inflation (CPI) Better than expected *Positive
Trade Balance Trade deficit (imports > exports) Negative
Central Bank benchmark rate Increase in interest rate Positive
ISM Manufacturing Index Better than expected Positive
PPI Producer Price Index Better than expected Positive

*Developed nations welcome moderate inflation as it is a sign of a growing economy. Developing nations view decreasing, or maintained, inflation as a positive statistic as this keeps price levels in check.

Technical Analysis

Technical analysis involves pattern recognition on a price chart . Technical traders look for price patterns such as triangles , flags , and double bottoms. Based on the pattern, a trader will determine the entry and exit points. Unlike fundamental traders, a technical trader is not as concerned about why something is moving because the trends and patterns on the charts are their signals.

Below is an example of a chart pattern – the double bottom pattern. The market makes the first low, rebounds slightly before creating a new low and subsequently gains upward momentum as the trend reverses. Technical traders will look to set a stop loss at the recent (lowest) low and wait for the market to produce higher highs and higher lows before placing the long trade.

In practice, technical traders will need to identify the pattern as shown below on the USD/JPY daily chart where the “W” shape can be seen.

A technical forex trader will assess the price action, trend , support and resistance levels observed on a chart. Many of the patterns used in technical analysis of forex markets can be applied to other markets as well.

Additionally, traders make use of indicators and oscillators which are added to a price chart when analyzing foreign exchange markets. Moving averages , Bollinger Bands, MACD , Relative Strength Index (RSI) , and stochastic tend to be some of the more common tools in a technical traders tool box. Indicators are preferred by technical traders because they are easy to use and provide clear signals.

The benefits of technical analysis

Technical analysis does not include ‘black magic’ that many fundamentalists claim. Getting started in technical analysis can be done quickly by assessing the direction and strength of trends . Traders will use the trend analysis to help them determine which pair to trade and the direction to trade it.

Below, is an example of how a technical trader would notice this 6,000 pip trend where the AUD is very strong relative to a very weak EUR (which is why the currency pair is moving down). Furthermore, it is clear to see that the currency pair is trading in a strong downward direction. This is referred to as a tend and traders make use of key levels, levels of support and resistance, and indicators to identify trends as soon as possible and with accuracy.

Finding out how to identify strong and weak currencies will provide traders with an indication of which currency pairs are most likely to trend and therefore lead to higher probability trades. A trader would trade in the direction of this particular trend by selling the EUR/AUD pair.

Technical vs Fundamental Analysis in Forex: Conclusion

Fundamental and technical analysis involve very different strategies and approaches to trading; offering unique value and insights to support trading decisions, and when to enter or exit a trade. While some traders prefer to use these types of analysis separately based on their preferred trading style and goals, many use a combination of the two. The benefits of combining fundamental and technical analysis are wide ranging.

Further reading to discover which type of analysis is best for you

  • Fundamental traders monitor economic data releases, and many do so with the intention of trading the news . It is essential that traders adopt sound risk management when doing so as volatility can spike immediately after important releases.
  • Technical traders have different styles and strategies . Explore these thoroughly to find out if this type of analysis suits your personality.
  • And if you are just starting out on your forex trading journey, you can learn the basics with our free New to Forex guide.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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