Using a broad brush, forex traders can be herded into two camps – the fundamental analysts and the price movement traders. On the surface it might seem that believers in fundamentals would be the more conservative traders but in currency markets they are likely to be the ones regarded as the riverboat gamblers.
Fundamental analysis involves the digesting of the various official reports released by countries that provide a snapshot of that nation’s economic health. These include such commonly known data as jobs reports, inflation numbers and productivity statistics. There are plenty more – individual crop reports, dissections of trade numbers, tracking of population shifts. Just about anything that affects an economy that can be quantified is collected and aggregated by a government.
Guest post by FXTM
Often this information is made public in the form of “news.” One would think that the better informed a forex trader is on the news the more rational subsequent trading will be. But here’s the kicker – markets do not move predictably on breaking news. Here’s an example. Some of the most profitable forex trades in history were executed in the aftermath of one of the biggest news events of the second half of the 20th century – the tearing down of the Berlin Wall. But no one knew how world currencies would react to the impending unification of Germany. There were big winners and also losers on the other side of the play. Trading in the forex market on fundamentals in the news is often no more grounded in logic than walking into a casino and betting on red at the roulette wheel.
One of the pitfalls of trading on the news is that there are so many variables vibrating around behind the hard numbers released in government reports. And most forex traders sitting at a desk will never be privy to the inside dope that can allow action to be taken before important news breaks. Fundamental analysts are nearly always trading on incomplete information.
Price point traders, on the other hand, argue that it is far safer to ground trades in the movement of currency prices since price action has already factored in all of the fundamental variables. In their world it is far easier – and more reliable – to judge the bread that comes out of the oven than trying to examine each individual grain that went into the dough.
In reality, most forex traders do not operate exclusively in one world or the other. Even if a price point trader is skeptical of fundamentals it is wise to keep abreast of the important financial news reports (interest rate announcements by the central bank, employment reports, consumer confidence surveys among them) since the release of this data can trigger volatility in the currency markets. They won’t be guessing which direction the markets will move but no trader wants to be caught unaware of impending volatility. Conversely, strict fundamentalists would do well to learn the price action on a currency value chart that illustrates the end product of all those government reports.
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