What is Forex Trading? A Detailed Guide Part 2 | Fundamentals vs Technicals
Humans have an absurd tendency to cling to their identity. "I am a firm believer in the importance of just fundamental analysis"... "I believe that only technical analysis is effective"... "I solely utilize indications," says the author... "I only utilize pure price movement," says the trader... Useless infantile pissing contests of ego-driven persons who need to chill down and relax, and above all, attempt to have a more flexible and adaptive mind and spirit — a very good thing for long-term trade survival.
Let me begin by saying that ANY knowledge you may obtain is valuable in the forex market. Period. Pure technicians who have no concept of what is going on in the market, as well as pure fundamentalists who are unfamiliar with trendlines, moving averages, and buy and sell zones, are at a disadvantage.
What is the difference between FA ("fundamental analysis") and TA ("technical analysis")? FA stands for macroeconomics, whereas TA stands for chart and pattern analysis, as well as the discovery of sale and buy zones, also known as supply and demand zones. Unless you are a multi-billion hedge fund trading trend (and even then), you must employ TA and abandon FA if you truly "want" to avoid one or the other... But why would you deliberately give up one of the market's most important components?
FA is the study of a country's economy, financial markets, and currency. You don't have to be a professional economist like me to grasp the fundamentals, and most "fundamentals" are "contained" in one handy and simple tool: moving averages! The H4 and D1 timeframes' 50-period moving averages show the majority of the fundamentals. The pair is "neutral" and both currencies are more or less "equal" in strength ("fairly" priced and "neutral") in present market conditions if the H4 MA50 is going up-down-up-down with no apparent upward or negative trend. If the H4 MA50 is generally heading up, the first currency in the pair has the upper hand over the second, implying that the first currency's "fundamentals" are viewed stronger by Big Money (hedge funds, large speculators, etc). When you have the knowledge of economics and finance to understand what is going on and see the big picture clearly, ALL of these moves can be explained and even generally followed and clearly understood "as they occur," but it is not necessary to have a deep understanding of all of the elements, as they are essentially "contained" in ("priced in") the moving average.
Isn't that fantastic? All of the fundamentals are reflected in the price: inflation, central bank bias and policy, global capital flows, growth, trade, jobs, credit, tax policy and regulation, politics, risk sentiment, asset demand, and so on. Everything is in the major MAs! Personally, I like to keep track of what's going on because I'm a currency, global finance, central banking, and macroeconomics economist, and it does help a lot, but it's not required - just know that MAs "contain" all the fundamental data you need!
There are two types of fundamentals that move markets: 1) what is going on right now, and 2) what the market's major players believe will happen (expectations): In the 1930s, John Maynard Keynes said, "Successful investing involves predicting the anticipations of others."
What actually happens OR what Big Money believes WILL happen, as well as things connected to actual capital flows owing to growth, trade, and competition, are the market movers for price:
More inflation is bullish (the long narrative, which I address in 12-week university courses in international finance or monetary theory, so please bear with me!!).
More jobs and growth is a good thing.
More is optimistic, according to credit.
Taxes: the lower the tax rate, the better.
Government spending: a huge "stimulus package" is bullish; otherwise, unless there is a government debt crisis, it has little impact (rare for the 8 currencies mentioned above).
The position of the central bank: a "hawkish" central bank will cause the currency to appreciate.
When a central bank wants to prevent a currency from appreciating (to help exports) but does not want to cut the policy interest rate (which would weaken the currency) for strategic or policy reasons (housing or asset bubbles, inflation, etc. ), officials will try to "talk down the currency" through comments and communications (CAD and NZD do this a lot). These techniques work for a few days, but they don't endure much longer than a week or two if the global forex market believes the currency "should" gain.
More exports are positive for the economy.
When a large amount of money from other countries is used to purchase financial assets, houses, or property in a country, the currency tends to appreciate... Moreover, if a large amount of foreign and domestic capital wishes to LEAVE the country, the currency may crash as a result of capital flight!
Market mood: bullish is fine, but JPY and CHF are unique in this regard, as they tend to appreciate when global markets become nervous (don't ask why — it's a lengthy tale).
If you get lost in the intricacies, here's a quick refresher to get you back on track: If a country's goods and services, as well as its assets (stocks, bonds, housing, land, and so on), are in great demand, the currency will be in high demand as well, and it will tend to appreciate. The other factors mentioned above have a big impact as well.
Fundamental analysis in forex includes "watching and comprehending what's going on" with these factors and the overall market mood, as well as an understanding of the relative influence and relevance of what's going on. It aids in determining your "macro bias" on a pair of shoes (buy or sell). If you have a better understanding of FA, you can also "trade the news" more profitably.
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