Fundamental or Technical Analysis?

 Fundamental or Technical Analysis?

Forex trading can be majorly analyzed either using fundamental or Technical analysis. 

News and Fundamental Analysis

When it comes to trading, whether it be Forex, Stocks, or Daffodils, most traders

have a plan that they base their particular trading method on. With Forex

trading, the majority of small retail traders like you and I would probably use some

sort of technical analysis, which is trading off the charts, using whatever

indicators, patterns, or setups you choose. Or you may even just wing it and trade

without anything on the charts. Still a method for some I guess.

Then some traders will ignore the charts and trade-off around major

news releases, which is the fundamental side of trading. I have already

touched on this above, but I’ll go over it again. Some traders use this as

their sole method of trading the forex market. Here we are trading based on a theory

on how you think the market will react to a particular news item like an Interest Rate

cut or something similar. Or you may have some long-term thoughts on the

Japanese economy where you may decide to buy or sell the yen against another

currency. There is some sort of news released every day that will affect some

currency in some way. The trick is to work out which way the news will affect the

currencies you are trading.

The problem with the news releases is that although they are just about all set at a

certain time if you are not aware of them, they can catch you out. For example, the

biggest news release is the Non-Farm Employment Change (use to be called NFP)

the figure which is released at 8.30 is New York time on the first Friday of every

month. Depending on the numbers that come out, this baby can move the market

100+ pips in a heartbeat, and if you are on the wrong side of it, look out! Within 2

minutes, the market may have moved 200+ pips. It does happen! Imagine how you

would feel if you just left the room to go to the bathroom without a stop in place,

only to return 2 minutes later to find your trade so far in the red, you feel sick.

Having said that, it could have also gone in your favor, but do you want to take that

chance?

What is my point here? Be aware of the NEWS!

Now the good news is that there are plenty of free news calendars available on the

internet, but the one I use can be found at Forex Factory. It is very simple to use as

you can modify it to suit your requirements. For example, if you only traded the

EUR/USD and you were only concerned about news that had a medium or high  

impact on those currencies only, then you can set up the filter to show these news

events only. Just click on the 'Filter' tab on the top right-hand side above the title bar.

There is plenty of information on what the news is about and how it may affect the

market if you are interested. It is also set in your local time, so that makes it easier

also. At the beginning of my trading day, I will open this site first and check for

news releases that may affect the pairs I am trading. I will write these down in my

journal, and if it is something big, I'll normally set an alarm to warn me about 10

minutes prior. This will then put me in a position to either tighten up stops on open

trades, close them or not enter a trade until the news release has passed. You must be aware of these news releases, especially if you are a short-term trader, and

make sure you have a plan in place if you are trading through them. 

    Technical Analysis

I've covered Fundamental Trading (news events), so now it is time to get into the

other common way of trading, and that is called Technical Analysis. Most of this

trading is done off the charts, hence the expression 'chartists' or 'technical analysis, etc. This is the way I trade, and it is the way a lot of others trade also.

Earlier I discussed how most Forex brokers offer a charting package with their

platform, and how the live data was free. This is good as it keeps costs down. Some

of these platforms have excellent charts, like the MT4 platform, Ninja Trader or VT.

This is where the Oanda FX Trade platform is a bit of a letdown as their charting

capabilities just don't compare. Having said that, you can still trade off the Oanda

charts with no problems at all; they just haven't got all the bells and whistles.

With technical trading, you can be as simple or complex as you like. I am not going

to go into all the various indicators, fibs, pivots, breakouts, trend lines, etc. There

are thousands of ways to trade and the Forex Trading forums are swamped

by them. So you can do your research here and find something that suits you.

The standard MT4 platform automatically comes with a large basket of various

popular indicators that can easily be loaded onto any chart with the settings you

choose and this is more than enough to get started. You can also add custom

indicators to the platform. This is a very simple process and there are thousands of

these custom indicators freely available online. Jump in the trading forums or

Google it. If you need to know how to load these indicators onto MT4, that’s where

YouTube is a great help. The resources available online these days are incredible,

but if you are having problems, you can always contact me.

I will discuss time frames. As we already know, the Forex market runs 24hrs a day

during the week, so there is plenty of opportunities to trade. Remember the previous

discussion on the different sessions also, which helps with regards to identifying when

the action is more likely to occur.

On the trading platforms, most brokers offer 1-minute, 5-minute, 15-minute, 30

minute, 60 minute, 4 hours, daily, weekly and monthly charts. That's the majority of

them. Some also offer tick, 10-minute, 2 hours, and 3-hour charts. Remember all this

data is live and it's free.

Everyone wants to be a Day Trader! Myself included. I think it is just a romantic

notion that is built into the human makeup. It is especially cool if someone asks you

what you do for a living, and you reply "I'm a Day Trader". It sounds impressive. I

wish it was that easy though. Because the charts and the data are so good, you are

always tempted to keep on shortening the time frame, where eventually you will be

trying to scalp off the 1-minute charts. This all sounds good in theory, but it is very

difficult to do.

Look, I'm not saying it can't be done as I am sure there are a few successful scalpers

out there. Not many I would imagine, but enough to show that it is possible. I have

tried all time frames, and even though I have probably had the most success on the

longer time frames like 4 hours and above, I am still a Day Trader at heart.

Again, this is a decision you have to make, whether you want to be in a trade for

days or minutes. Trading the longer time frames will give you fewer

trades, but more than likely larger profits, and spend more time monitoring than

trading. Trading off the shorter time frames will give you more action,

more spreads to make up, and more than likely smaller profits. Then you would

have considerations like stop size. Trading on a Daily chart may require you to have

a stop 120 pips away from your entry price, and when you consider the 2% risk

rule, you would end up with much smaller position size. Now, if you were trading

off the 5-minute chart and had a 15 pip stop, and using the same 2% risk, you can see

that your position size would be much larger. The trade of being the possible

potential profit as I'd expect to drag a lot more pips from a Daily chart trade than a 5

minute chart trade. Bit of a catch-22 here.

Then you have to decide which pair or pairs you want to trade. If you are trading

multiple pairs on larger time frames, it is quite easy to do so. This may also help

with giving you more action if that is what you are after. But trading multiple pairs

on smaller time frames can be a little stressful and sometimes difficult to keep

control of when things start moving quickly. It also plays with your mind a little,

especially if you have a losing trade on one pair and try to make up for it on another

pair, which may cause you to ignore your normal exit rules. I think they call this

revenge trading.

If you are going to trade off the smaller timeframes, may I strongly suggest you

concentrate on one pair to start? This just makes life a lot easier and you can put all

of your efforts and concentration into this one pair 

  My bread and butter setup, is the EUR/USD on the 5-minute chart, with a 60-minute

chart next to it, just to give me an idea of the general trend. I have a couple of basic

indicators on both charts. I chose EUR/USD for a couple of reasons. Once it has

the lowest spread on Oanda, dropping down as low as 0.5 pip during normal trading

times, and two, it is by far the most popular currency pair traded. I think it accounts

for close to 70% of total Forex volume. Don't quote me on that though! I have a

target amount of pips for the day and then I am done. I close down my charts and do

other stuff. I sleep better when I have no trades on.

The above is what I do, and what works for me. It may not work for you and I'm

certainly not trying to convince anyone to follow my path. If you have had

experience in trading anything, you will know that there are thousands of different

ways to trade, and Forex is no different.

If you were after a good book on Trading in general, then may I suggest a book

called 'High Probability Trading by Marcel Link. It covers all the major topics and

is quite informative considering it is such a huge topic. He does a great job of

covering the understanding and use of the majority of the most used technical

indicators. It is a book that would be well placed in any good trading library. The

other “book” I would suggest is 'Google' as it is the world's biggest library by far

but please remember, you have to sort out the good from the bad.