Forex: Technical Analysis vs. Fundamental

For those who don’t know the dichotomy between technical and fundamental analysis, I will quickly outline it. Technical analysis is a method which uses the study of past market action as a method of predicting future price movements. Whereas fundamental analysis looks at the fundamentals of a particular currency, which include Government policy and supply and demand. A lot of trading strategies successfully combine the two, while others favor one or the other. 

 
The majority of over the counter retail traders seem to largely ignore the fundamentals behind a particular currency rather paying attention only to technical indicators. One of the key reasons behind this that over the counter traders are mainly opening positions to try and take advantage of short term movements in prices. The standard way most day traders decide what trades to place is by using various charting techniques. While this can be an effective strategy, many traders completely overlook the fundamental factors completely. 

Why do the majority completely ignore fundamental factors? The main reason seems to be that a fundamental approach takes a much longer time to pan out. This doesn’t suit over the counter traders who are often trading using derivatives such as CFD’s and therefore have to factor in over night costs of keeping a position open for a considerable amount of time.  This costs could potentially eat away at any profit that might be made by taking a longer fundamental based approach to Foreign exchange. This is not a problem for a big institution such as a hedge fund or investment bank who can trade Forex on the international markets, unless the said institution is heavily leveraged.  For example George Soros’s Quantum Funds had to wait out a significant period for their short position on the Thai Bait in the 90’s to come to fruition. 

While for most over the counter traders taking a long term fundamental approach has some serious and obvious downsides (roll over costs etc.). I contend that every trader should have an understanding of the fundamental factors at play when trading Forex. The reason that a lot of news stories cause price changes, is they either change the fundamentals behind the currency price or they give indications that the fundamentals may be changing. I would recommend that as Forex trader you go and research the fundamentals behind Forex prices, there’s a lot of good information out there for you to consume.

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