Among the many skills essential in your Forex trading technique is the ability to analyze. There are 2 major types of Forex analysis which are fundamental analysis and technical analysis. I will show you the different types of fundamental analysis trading and perhaps you will learn how to apply it in your Forex trading strategy. If you are strictlya technical trader, you may profit and maybe boost your success by means beyond your current approaches.
In short, Fundamental analysis depends on the news reports: political and economic factors. Traders who use fundamental analysis will observe various news sources: TV, radio, and news feeds on the web; to learn about the political and economic factors that could move the currency prices. For example, if the US Non- Farm payroll report is good, it will cause the US dollar to move up. In case the number is disappointing, then the US dollar will drop against other foreign currencies.
Each And Every major news release includes a forecast or consensus figure based on economists prior to news release. If the actual release number is different from the predicted or expected figure, the market is surprised and definately will react to the release immediately. The bigger the surprise, or deviation, it will produce greater reaction. As an example, if the upcoming US ISM Non- Manufacturing PMI has a forecast number of 54. 5, and our standard deviation is 3. . The actual release comes out as 50. 5. Since actual deviation is 4. , you would enter a short trade on USD/ JPY, USD/ CAD, or USD/ CHF or maybe a long trade on GBP/ USD, AUD/ USD, EUR/ USD.
There are actually three main methods to trade the fundamental analysis: Spike trading, Retracement trading, and Pre News trading. Trading the spike is considered the most popular method to trade the fundamental analysis, and is the best known. Most Fx traders usually associate spike trading with fundamental analysis trading. To trade the spike, basically we wait for the news release to come out. Based on the actual release number we will enter the market promptly if our expected deviation is hit. This type of trading requires that you have access to the news release immediately when it is released, have a fast reaction to entera trade, and also have a good broker that allows news trading.
To trade the retracement, we wait for the news release to come out, we wait for the initial spike, and then we will wait for the market to retrace back within just 10-15 pips of the pre- release price. Often when we have a huge deviation, we can go into the market at 20 pips from the pre- release level, but it will be dependent on your own discretion. Market will usually retrace within the first 5 to 30 minutes, if a retracement is to occur. This trading method is especially simpler to initiatea trade, simply because we stay away from the preliminary volatility of the initial news release, and many Forex brokers permit this type of news trading.
Pre News trading, this method of fundamental analysis trading is probably the most advanced and the most challenging to analyze. Basically, we base our entry on market sentiment and technical trend of the currency pair and we get into the market 5 minutes prior to actual news release. It is recommended to enter in the direction of the current trend and only use this trading method with news releases that will not change the market trend. As an example, you must not use this method for the US Non- Farm Payroll, GDP, and CPI; but we are able to pre- news trade the Retail Sales, Trade balances, and PMI reports.