Forex Focus When two are better than one: Power up your forex trading by combining fundamental and technical analyses.
Access to foreign exchange trading has opened up exciting trading options for the retail trader. You can now trade alongside corporations and institutions in a highly liquid market that is global, traded around the clock, and highly leveraged. Before jumping into this market, however, we must understand the factors that affect the forex market. With that in mind, STOCKS & COMMODITIES has introduced Forex Focus to better prepare the retail trader to participate in the currency market.
Fundamentals Or Technicals?
by Boris Schlossberg
Arguments between technical and fundamental traders often become fanatically intense as one side tries to prove the other wrong. Technicians assert that all news is discounted in price almost instantaneously and therefore fundamental knowledge is of little use in determining the forward direction of the move. Fundamentalists state that technical analysis offers nothing but the summary of the past price action. After all, just as success in sports like tennis depends not on where the ball is but where it is going, so too in trading, profit and loss does not depend on where the price stands currently but on where it will be in the future. Therefore, fundamentalists argue, trading technically is akin to driving a car by looking in the rear-view mirror.
THE FUNDAMENTALS
Yet when it comes to the currency market, both technicians and fundamentalists could benefit for each other's analysis. The currency market, which reflects the fortunes of nations rather than individual companies, trades on big macro economic ideas such as government economic reports, central bank announcements, and political conflicts. It is therefore quite sensitive to news surprises and tends to create sharp reactive moves. In fact, take a look at any hourly chart of a major currency pair such as EUR/USD (euro/US dollar) or GBP/USD (British pound/US dollar), and chances are the large-volatility candles are the result of a significant economic or political surprise.
Instead of ignoring the news, technicians should appreciate the importance of news. Strongly positive or negative news tends to have more than a momentary impact on price. The forex market is composed of many participants, ranging from money center banks to multinational corporations to investment brokerdealers to retail traders. As news is distributed across the world, each of these agents exerts an influence over the trade, often causing continuation in price. Trading this continuation requires the skills of a technician, as many common tools of technical analysis such as Fibonacci support and resistance zones come into play.
Quite often, the most immediate post-news reaction after the initial price adjustment is the move in the opposite direction of the news. Technical traders often make the mistake of assuming that all of the news has been factored into the price and they try to trade the bounce.
Return to November 2007 ContentsOriginally published in the November 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.