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Basically you can trade so to speak in three ways using:
- Fundamental Analysis
- Technical Analysis or
- A mix of both.
What’s the difference? Let’s see.
Fundamental Analysis
Fundamental Analysis is a type of market analysis that uses market trends to determine the future value of a particular currency based on economy, politics, environment and other relevant factors and statistics that will affect the basic supply and demand of a particular nation’s currency.
The basis of fundamental analysis is mainly on the political and economic changes as these can frequently affect currency prices. Thus, traders are most likely to gather information from news sources to determine unemployment forecasts, political ideologies, economic policies, inflation, and growth rates. Traders keep an eye on the figures and statements given in speeches by important politicians and economists, as well as announcements related to United States economy and politics. Speeches from prominent people like the Chairman of the Federal Reserve Bank of USA, Secretary of Treasury, President of the Federal Reserve Bank of San Francisco and so on. This also applies to Europe prominent people too.
This is purely chart trading where an analysis of chart patterns and price action only is taken into account to take decisions for trading.
Normally reversal patterns, trend lines, support and resistance levels, pivot points, trend direction and a number of indicators are used. A number of systems have been derived for technical analysts to enter and exit trades and we explain quite in detail a number of proven techniques that can be used to make nice profit in the Forex Market.
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Technical Analysts do not listen to news, they just trade price action. Top technical traders like Tom Strignano claims that the price of the news has already been reflected in the market two or even three weeks prior the news is released. Remember that banks are the market makers.
As a technical trader though you need to be extremely careful when major news are scheduled to be released during the day. FOMC news, Non-Farm Employment Change etc. may have major impact on the price when the news is released. The price may go violently up or down depending on how the news is interpreted. I have seen scenarios where the price moved up by 60-100 pips and suddenly dropped by another 80 pips or more within 30 minutes or so.
Some brokers also suspend trading during news releases, so if you are unaware of this you may be caught in a trade unintentionally with the risk that your trade hits the stop loss, and you are helpless there and you can’t do nothing!. Then just to make things even worse, the price normally settles down and returns just to where the price was prior the news release! But your trade is over with a loss! Could go in favour of you anyway, but normally first it goes against you!
Also, those brokers that do not susp[end trading, they widen the spread and I have seen a spread of 14 pips in Eur/Usd currency pair where typically the spread is 1-2 pips. Are you that stupid to pay 14 pips spread? I am not that stupid and I am sure you are not too.
You will also get a lot of re-qoutes from the broker, and apart from being charged high spread, you are entered normally in the worst price possible at that time.
Be Careful
To see a calendar of when news releases that may affect price are going to be released visit http://www.forexfactory.com/calendar.php. Just be careful during this period.
Personally I am a technical trader and I don’t listen to news, since I do believe that the news is already in the market. In fact notice that most of the time, news releases will violently goes up and down, and soon afterwards the market settles down again to the same price levels as before. Definitely new trends may start at news times, but personally I don’t care why a trend has started and the other one has finished. All I need as a technical trader is a trend
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