Fundamental Analysis On Forex Trading

It has become imperative for every forex trader to learn how to predict the price trend and which method or software is the best.

When you do forex trading, it is very important to understand the difference between fundamental analysis and technical analysis. A quick explanation of the difference among the two types of analysis is: fundamental analysis focuses on money policy, government policy and economic indicators such as GDP, exports, imports etc within a business cycle framework while technical analysis focuses on price action and market behavior, especially on chart and technical indicators.

Needless to say both schools are equally disparaging about the other, and both believe their techniques are infinitely superior. But the reality is that it has become increasingly difficult to be a purist of either persuasion. Fundamentalists need to keep an eye on the various signals derived from the price action on charts, while few technicians can afford to completely ignore impending economic data, critical political decisions or the myriad of societal issues that influence prices.

Generally speaking, fundamental analysis can only judge which direction the market will move, and technical analysis can supply both direction and rough currency rate.

Keeping in mind that the financial underpinnings of any country, trading bloc or multinational industry takes into account many factors, including social, political and economic influences, staying on top of an extremely fluid fundamental picture can be challenging. Meanwhile, forecasting models are as numerous and varied as the traders and market buffs that create them. Different people can look at the exact same data and come up with two completely different conclusions about how the market will be influenced by it. At the end, some may make huge profit and some lose their money. You can not say fundamental analysis is easy.

Remember, fundamental analysis is a very effective way to forecast economic conditions, but not necessarily exact market prices. For example, when analyzing an economist's forecast of the upcoming GDP or employment report, you begin to get a fairly clear picture of the general health of the economy and the forces at work behind it. However, you'll need to come up with a precise method as to how best to translate this information into entry and exit points for a particular trading strategy.

Tip: If you are new to do forex trading and do not trade frequently, you can mainly use fundamental analysis for your trading.

Don't disturb yourself by information overload. Sometimes traders fall into this trap and are unable to pull the trigger on a trade. Normally, your first feel is the answer for you to do forex trading. At that time, you are sure which currency is strong and which country's economy is good. The more simple, the more useful.

However, trading a particular market without knowing a great deal about the exact nature of its underlying elements is unbelievable. You might get lucky and snare a few on occasion but it's not the best approach over the long haul.

For forex traders, the fundamentals are everything that makes a country tick. From interest rates and central bank policy to natural disasters, the fundamentals are a dynamic mix of distinct plans, erratic behaviors and unforeseen events. Therefore, it is very important to understand fundamental analysis and use them on forex trading.

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FOREX Fundamental Analysis Defination with Description.

Most FOREX traders rely on analysis to make plan their trading strategy. This article will discuss fundamental analysis. The other common form of analysis is technical analysis. After reading this article you should have a better understanding of fundamental analysis and how to use it as part of your FOREX strategy.

Political and economic changes are the basis of fundamental analysis. These can frequently affect currency prices. Traders that take advantage of fundamental analysis will gather their information from a variety of news sources. They are looking for information about unemployment forecasts, political ideologies, economic policies, inflation and growth rates.

Fundamental analysis will provide you with an overview of currency movements and a broad picture of the economic conditions. Most traders then will combine their fundamental analysis with technical analysis to plot actual entrance and exit points as well as confirming the information provided by their fundamental analysis.

Just like most markets the FOREX market is controlled by supply and demand. Many economic factors can affect the supply and demand but the two most critical ones are interest rates and the strength of the economy. The over all strength of the economy is affected by changes in the GDP, trade balances and the amount of foreign investment.

There are many economic indicators released by government and academic sources. These indicators are usually released on a monthly basis but will sometimes be released weekly. These are pretty reliable measures of economic health and are closely followed by all traders.

There are many indicators that are released but some of the most important and commonly followed are : interest rates, international trade, CPI, durable goods orders, PPI, PMI and retail orders.

Interest Rates - can cause a currency to either strengthen or weaken depending on the direction of movement. In some cases high interest rates will attract foreign money, however high interest rates will frequently cause stock market investors to sell of their portfolios. They do this believing that the higher cost of borrowing money will adversely affect many companies. If enough investors sell of their holdings in can cause a downturn in the market and negatively affect the economy.

Which of these two affects will take place depends on many complex factors, but there is usually an agreement among economic observers as to how the current change in interest rates will affect the general economy and the price of the currency.

International Trade - If there is a trade deficit (more items imported than exported) it is usually considered a negative indicator. When there is a trade deficit it means that more money is leaving the country to buy foreign goods than is entering the country and this can have a devaluing effect on the currency. Usually though trade imbalances are already factored into the market consideration. If a country normally operates with a trade deficit then there should not be an affect on the currency price. The currency price will normally only be effected by trade differences when the deficit is greater than the market expected.

The measurement of the cost of living (CPI) and the cost of producing goods (PPI) are a couple of other important indicators. You should also watch the GDP which measures the value of all the goods produced in a country and the M2 Money Supply which measures the total amount of currency for a country.

In the US alone there are 28 major indicators, these can have a strong effect on the financial market and should be closely watched. This information can be found many places on the internet and is provided by many brokers.

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Money Management Strategy in Forex or Stock

This article deals with one of the most important aspects of trading - money management.

Although there are plenty of trading systems and trading strategies with good win/loss ratio, proper money management can change the outcome of the net profit amount for any trading system.

Essentially, money management strategy is a statistical tool to control the risk exposure and profit potential when we enter into a trade; and by applying it, we can control our emotions and lack of plan (the main reason why most of traders lose their money).



The importance of determine a stop-loss

C.O.N.T.R.O.L... When a trader lose control the results are often disastrous. Many traders often enter the market with a profit target, but without a clearly defined protective stop-loss.

With a pre-determined profit target and a pre-determined stop-loss, you know where you will get out if you are wrong and where you will get out if you are right. In other words, you have control.

Diversification - Trade more then one currency pair

When trading more then one currency pair, i.e. EUR/USD, USD/JPY, USD/CHF, GBP/USD atc., each pair would have a different stop-loss and profit target. With multiple currency pairs, each having a different entry and exit points you can smooth your system equity curve so your account draw-downs will be smaller.

Note: It's important that you diversify your orders between currencies that have low correlation.

Case study - Fixed Ratio With Fixed Number of Trades

Money management is the most significant part of any trading system. Our Forex money management strategy is simple to implement, conservative and practical when combined with one of our trading tutorials strategies.

First of all, you should understand the following terms:

Fixed Risk Ratio
Never risk more than 2% of your account size on any single currency pair, if possible, risk less. Plus, never risk more than 10% in any complex of open positions, on any given day. For any given trade you must know how much you will lose if the market goes against you.

Example - According to our money management strategy, you should be risking no more then 2% of you balance per single trade. So, if you start with $1,000 account size you may lose up to $20 in one trade, i.e. If the trade is stopped, you will lose $20 which is 2% of your initial balance.

Please note: You can open up to 5 parallel trades (other pairs), at the same time - max risk = 10% from your initial balance.

Fixed Number of Trades
The "fixed number of trades" parameter derives from the trading system profitable factor, as follows:

Trading System Percent Profitable (no. of winning trades / total no. of trades)	fixed Number of Trades
60%	40
65%	35
70%	30
75%	25
80%	20
85%	15

Forex money management strategy implementation

Now that we have these two parameters (the fixed risk ratio and the fixed number of trades), let's make an example:

• Account size = $2,500


• Fixed Risk Ratio = 2%


• Fixed Number of Trades = 30 (we use trading system with 70% winning trades expectation - see table above).

In this case we can lose up to $50 ($2,500 * 2%) at any given trade for the next 30 actual trades. Then, after 30 trades we will re-calculate our maximum risk amount, i.e., if the new account size is now $3,000, we can afford to lose up to $60 at any given trade for the following 30 trades, and so on.

Basically, we re-calculate the risk amount (based on the fixed risk ratio and account balance) after each fixed number of trades, in this example, 30.

Note: You can adapt this money management strategy to fit smaller or bigger trading accounts, providing you stick to the 2% risk rule.

Forex Intra-Day Trading Strategy

Overview

This forex day trading strategy will focus on one of the best analysis method for forex trading - the use of multiple time frames.

Basically, in this strategy, we will use the longer timeframe (chart #1) to define our support and resistance price levels and the shorter timeframe (chart #2) for our trading entry, stop-loss and exit levels.

Also, for confirmation and momentum measurement we will use slow stochastic oscillator indicator (one of the best momentum indicators).

Forex day trading strategy rules:

1. We use two time frames, long time frame - 4 hour and short time frame - 15 minute.


2. We identify the support and resistance price levels on the longer timeframe a day before.


3. We apply the stochastic indicator in both time frames to determine if we enter long or short position in our next intraday trading.

Case study - Forex (Foreign Exchange) USD/JPY Multiple Time Frame Bar Charts

USD/JPY 4 Hour Bar Chart (Chart #1)



Indicators and Parameters:

Support and Resistance Price Levels (Gray) - we use the swing pivot points of the previous day (yellow rectangle); 116.15,116.27,116.43,116.70 and 116.76.

Slow Stochastic Oscillator (lower window) - we set the stochastic indicator parameters for both time frames, as follow: %K period = 8, %D period = 3, Slowing = 3 (optional).

Forex day trading strategy practical analysis:

Chart #1 displays the 4 hour timeframe for the previous day (14 August).
What we can learn from this chart?

1. Resistance and Support price levels for the next day, our trading day, 15 August.

• 
  
  High = 116.73 (bar 6)


• 
  
  Low = 116.15 (bar 1)


• 
  
  The High of the swing move 0-1 = 116.43 (also the high of 11 August)


• 
  
  The High and Low of the swing move 4-5 = 116.70 (high) and 116.27 (low)

Note: as an opposite from calculated pivot points our price levels are generated from actual swing trading on this day.

2. What type of trading position we will favor the next day; short or long?

As you can see, the stochastic oscillator create diversion with this currency pair price (green line), i.e. the momentum is weakening; plus the stochastic indicates on an overbought situation (above 80 level). So, the next day (15 August), we will try to find conditions to enter a short position.

USD/JPY 15 Minute Bar Chart (Chart #2)



Forex day trading strategy - our trading day, 15 August:

At Chart #2 we can see the previous day - 14 August (yellow rectangle), our support and resistance price levels that we already identify, and the open price of our trading session at 116.62 (bar 1).

Because the open price of this day (116.62) is contained within a support/resistance horizontal channel, 116.43-116.70, and we want to place a short position, we have two options:

1. 
   
   We can enter short at 116.70, when the price retrace toward the resistance line.


2. 
   
   We can enter short at 116.38, when the price penetrate the support line (5 pips to confirm breakout).

In this case, USD/JPY currency price carried out the 116.70 short order (point A). As always, we placed immediately a stop-loss order at 116.81, 5 pips above the upper resistance price level; and a profit target order at 116.43, the next support level (point B).

Forex Day Trading Strategy Implementation

You can implement this forex day trading strategy on any fx currency pair. The mentioned setup and rules can be found almost everyday in the foreign exchange market. Good trading...

Descending Triangle Chart Pattern | Demand Index Indicator

Overview

A Descending Triangle chart pattern is a continues price formation; when combined with a Demand Index Indicator properly, over 75% of our trading positions will be profitable. By definition, the Descending Triangle chart pattern indicate a sell pressure; You can see visually that the sellers sell at lower prices as time progress (A,B and C).

Professional trader will use Demand Index indicator in several ways. I will focus on this indicator ability to predict trend strength, so, if the indicator stays near the level of zero for any length of time (see blue rectangle in chart - lower window) we can anticipate a price breakout.

Case study - NASDAQ-100 Index Tracking Stock ETF (QQQQ) Bar Chart



Indicators and Parameters:
Descending Triangle chart pattern - continues (red) - normally formed in a few week period, and consist from an upper descending resistance line (A-B-C) and support line (2).
Demand Index (red; lower window) - calculated by the change in price and volume alike.

How to use the Descending Triangle chart pattern - practical analysis:

The first step is to recognize we are dealing with Descending Triangle price formation, to do that we must identify:

1. Descending resistance line with two or more reaction points (points A-B-C).


2. Support line (2), horizontal line, with two or more reaction points.

Second, we have to define our profit target by finding the delta between line 1(green) price level and line 2(red) price level. In our case, the delta equal 1.75 points (43.05-41.30). So, line 2(red), the support line, minus the delta equal our profit target at 39.55 (blue line #3).

Point D - This is our entry point.
The short order entry price is 41.05 and our stop-loss order price is 41.55; why?

Very important: we determine our profit target and stop-loss orders with the assistance of mathematical calculations. First, we anticipate a winning ratio of 75%, i.e. we will win with this strategy 3 times out of 4, and second, we want at least 1 to 3 win/loss ratio.

So, we will divide our delta (1.75) by 7 and use the triangle support line(2) as our pivot price level (41.30). Then, we calculate our orders price, 41.30 minus 0.25 = 41.05 as our entry, and 41.30 plus 0.25 = 41.55 as our stop-loss.

Point E - We closed our short position at 39.55 - profit target.

Note: Because descending triangle is a bearish pattern which indicates distribution of money, the combination with Demand Index indicator is a very powerful one.

Descending Triangle Chart Pattern

In order to qualify as a descending pattern, at least two reaction highs are required to form the upper trend line (in our case - three). Also, at least two reaction lows required to form the support horizontal line.

Basically, the trader must see a visual Triangle chart pattern emerging from his price chart.

Establishing a Comprehensive Forex Strategy..

Forex trading involves a lot more than just pulling up a forex broker’s Web page and funding an account. Traders need to spend some considering just what kind of forex trader they want to be and that means the answer is more than just being a profitable forex trader. Forex trading is all about making money, but almost as important is the methodology a trader uses to obtain those profits. There is more than just one forex strategy out there and traders need to establish exactly which forex strategy is going to work for them before throwing real money at the market.

Some traders will stock to one forex strategy as soon as they identify that it works for them, while others like to tinker among several strategies before deciding on one. Other traders may use a combination of several different forex strategies on a daily basis and that can work, too. Some traders prefer technical analysis where they study chart patterns and indicators. Others are fundamental traders that follow economic news events. And of course, there are several different ways to approach trading. You can be a day-trader, a swing-trader, scalper or long-term investor and so on.

The most important to thing for new forex traders to remember is that a lot of one’s success with forex trading lies with selecting a forex strategy that works for you. You may have a friend that successfully trades forex, but his forex strategy may not work for you. The best forex strategy for you is the one you’re most comfortable with. And remember that no empirical evidence exists to suggest that one forex strategy is superior to another in terms of making pips.

To be sure, the recipe for determining the best forex strategy for you is going to have several ingredients. If you’re a technical trader, you’re going to have learn at least a few of the major chart patterns like the head and shoulders, reverse head and shoulders, double top, double bottom, ascending triangle and descending triangle. You’ll also need to establish what indicators you want to use with your trading (MACD, RSI, Stochastics, etc.)

On the other hand, a fundamental trader might want to pick a few of the major economic news events to trade around because there are simply too many to follow. Perhaps you’ll decide on Federal Reserve interest rate decisions, U.S. and Eurozone unemployment data and U.S. and U.K. GDP news. This gives you plenty of regularly released data points to trade off of without becoming overwhelmed.

The bottom line is selecting your forex strategy on par with selecting a forex broker and deciding on how much money to initially fund your account with. There are plenty of resources all over the Web to help you make your decision and we suggest you explore as many of these avenues as possible before committing to any forex strategy. A little homework at the beginning can save you from some big losses in the end.