There is no doubt that the supply and demand situation drives currencies and today with the internet we have better fundamental information and news than ever before - so why is it so hard to trade the fundamentals? Let’s take a look at why and how to use fundamentals correctly.
Markets Discount
Today news stories are available in any corner of the globe in a split second at the click of a mouse – and this is the problem as well as the advantage!
The news is discounted in a split second and the markets are then looking to the future – by the time you have acted the news is taken into account.
In times gone by the fundamentals would take longer to spread and you had a window of opportunity to take advantage of them – this no longer exists.
Volatility
Has increased dramatically over the last few years and trading individual news stories is not an option anymore.
Take a look at non-farm payroll and check out the volatility - if you can trade that you’re a better trader than me.
So can you trade the news at all?
The answer is yes and no.
We all know the long term fundamentals drive the longer term trends but this doesn’t help you time your entry.
1. Establishing the Longer Term Trends
You can keep the long term fundamentals in mind and use technical over bought or over sold areas to time your market entry. This is effective for long term trend followers.
2. Spotting Contrary Trades
You can also use the fundamentals to catch big profitable contrary trades.
It’s a known fact that markets currencies drop when the news is most bullish and rally when the fundamentals are most bearish. If a currency has extremely bearish news and fails to go lower or rallies than you may have an important turning point at hand.
The real problem with fundamentals is trying to work out what the participants think of them and how far they have been discounted and in our view you should keep these points in mind when trading:
1. Avoid trading short term news stories such as non-farm payroll and other economic realises.
2. Use long term fundamentals to establish the best trends.
3. Use market reaction to very bullish or bearish markets to look for contrary trades.
Trading the fundamentals is hard when you do so in isolation but as part of an overall forex trading strategy then can help you establish areas of value and also indicate the strength of longer term trends.
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Article Source: http://EzineArticles.com/?expert=Monica_Hendrix
http://EzineArticles.com/?Forex-Trading-Fundamental-Analysis---Causes-Losses-for-Most-Traders-Why?&id=727671
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