In our last lesson we wrapped up module 3 of our free forex trading course with a look at some of the major factors that need to be considered when trading the carry trade strategy. If you have followed all of our lessons up to this point you should now have a good understanding of the basics of forex trading, the logistics of executing trades on a forex trading platform, and how trade flows and capital flows are the two broad categories of things that move the forex market. In today's lesson we are going to start a new module on the fundamentals of forex trading with a look at the question of should traders focus on fundamentals or technicals in their trading?
As we learned in our free basics of trading course in the free course section of InformedTrades.com, traders analyze any financial market including the forex market in one of 3 ways:
1. Through Fundamental Analysis
2. Through Technical Analysis
3. Through a Combination of fundamental and technical analysis
While which method a trader chooses is ultimately up to them and their trading personality, it is my opinion that a trader who at least has an understanding of both technical and fundamental analysis is in a better overall position to trade profitably, than someone who focuses on only one school of thought.
To help understand this lets say that I am a trader who studies technical analysis and believes that at least in the short term, which is the time frame that I trade on, that technicals are all that matter. Next lets say that I am looking at a chart of the EUR/USD at 8:20 AM on the first Friday of the month, and my technicals are telling me that the trade is a good buy.
If I focused purely on technical analysis then I would probably enter that position not knowing that at 8:30 AM I may be in for a surprise that I was not expecting. As those of you who have been through module 8 of my basics of trading course know, at 8:30 AM on the first Friday of the month Non Farm Payrolls (NFP's) are released, which historically has been one of the most market moving fundamental releases in the forex market.
While I am not saying that a trader who trades on technicals should not take a trade that looks good to them from a technical standpoint because of weak fundamentals, what I think this shows is that technical traders who at least have an understanding of fundamentals have the ability to decide whether or not they should factor in a specific piece of fundamental information or no. In my opinion this gives them a big leg up on technical traders who dismiss fundamentals altogether.
Now lets say that I am a trader who trades a carry trade strategy which trades based off of a model I built to forecast interest rates based on fundamental news releases. Next lets say that my model generates a buy signal at 1.4700 which I have included on the chart on your screen. Would my trading not be better served if I at least knew that there was a major head and shoulders top in place, so technically the market is very weak here?
As with our technical analysis example what I am not saying is that a trader who trades on fundamentals should not take a trade that they feel is good from a fundamental standpoint when the market is weak from a technical standpoint. What I am saying however is that fundamental traders who at least have a basic understanding of technical analysis have the ability to decide this for themselves. In my opinion this gives them a big leg up on fundamental traders who dismiss technicals altogether.
As you have probably realized if you have been following my courses, they are designed to give traders a knowledge of both fundamental and technical analysis because I believe a knowledge of both puts traders in the best position to learn to trade profitably. I also believe that you can't really make a decision if you are going to trade based mainly off of technicals, fundamentals, or a combination of the two unless you have a sound understanding of the basics of both fundamental and technical analysis.
As we have already covered the basics of technical analysis in my free basics of trading course, I am assuming that everyone already has an understanding of this. With this in mind the rest of this course will be focused mainly on the fundamentals of the forex market, which we will start with in our next lesson. If you have not done so already I encourage you to go through module 8 of the basics of trading course located in the free course section of InformedTrades.com which gives an introduction to fundamental analysis.
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