Most forex traders will already have an idea about whether they consider themselves a fundamental or technical trader, based on the way in which they make their trading decisions. For technical traders, trading setups are completely chart-based, with recurring patterns and high-probability indicators allowing setups to be traded mechanically. For fundamental traders, the majority of their trading decisions will be based on the longer term, underlying forex trends which push currency markets higher or lower over a period of time. Other traders may utilise a combination of both technical and fundamental information to decide on which trades they prefer to take. Whilst neither way is better than the other, it is beneficial to know which way you prefer to trade in order to develop your trading ‘personality’.
Technical forex trading
For technical traders, charting is an essential element when looking for profitable opportunities on both short-term and long term timeframes. For day traders especially, looking for short term price patterns on the higher timeframes can allow them to see the underlying direction for trading on the shorter timeframes, which is why many will choose to flick between these in order to find the most highly profitable trading opportunities.
Technical trading can include recognising popular trading patterns which show traders what is likely to occur in the near future. Whilst technical trading is not a perfect crystal ball and is not a guarantee of the future direction of price, it does offer a strong reason to take a trade based on two assumptions. The first assumption of technical traders is that the trading pattern (double top, head and shoulders, wedge etc.) develops over a period of time and is a visible demonstration of strength or weakness in the market. The second is that, because there is a whole load of other traders seeing exactly the same pattern and expecting the market to react in a similar way, it becomes self-fulfilling and this increases the likelihood of the price movement occurring.
Fundamental forex trading
Fundamental traders, on the other hand, are not so focused on visual patterns but look to data and news events to drive prices higher or lower. Key economic indicators (GDP levels, employment data and interest rates etc.) are monitored by fundamental traders who then buy or sell currencies based on this information. These key indicators are the underlying drivers of the markets and provide the real-world rationale for forex pairs to move higher or lower. Although fundamental information, such as big news events, can be very successfully traded on an intraday basis, many fundamental traders look to hold their positions for longer periods of time. This essentially allows traders to use the trend as their friend; trading with the underlying factors which push currencies higher and lower.
Combining technical and fundamental forex trading
Although neither technical nor fundamental trading can be considered the only ‘correct’ way to trade, the preference of either will demonstrate different types of forex trader. These trading techniques do not have to exist separately either, with many traders combining fundamental and technical elements in to their analysis to try to ensure that they have as many things on their side as possible before taking a trade.
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