Combine Fundamental & Technical Analysis To Master The Forex Market
In this video, we will be looking at combining fundamental and technical analysis, which are the yin and yang of forex trading. Professionals, including institutional traders, tend to take a balanced approach when incorporating fundamental and technical analysis into their trading. Whereas some professional traders will lean towards fundamental analysis and incorporate technicals into where they see price action going based on current or future economics. However, many retail traders tend to lean towards technical analysis.
Traders who wish to be more rounded need to take both of these into consideration in order to be more consistent, and this involves having a good knowledge base of both.
Fundamental data releases can offer us the directional bias when trading. As well as waiting for the release, markets will often anticipate price action direction leading up to an economic data release, especially if analysts believe the data is going to be above or below expectations. And therefore, it is important to try and second guess what the markets are expecting in the run-up to the release and then where price action will go once the data has been delivered into the market. For example, sometimes market data might be worse than expected by the markets, and yet price action goes in the reverse direction as you might expect. This is one of the reasons we see a lot of volatility surrounding high-level data releases, which is because people have varying opinions on the effects of the data.
However, traders are advised to play the probability game; i e., if the market data release is bad, we should expect bearish price action, and if the market data is good, we should expect bullish price action. If technical indicators subsequently work in line with the data, and in line with the fundamentals of the data release, then we should trade accordingly Having pinpointed an ideal entry. This way, we will be stacking the odds in our favor for a successful trade.
There are many ways to incorporate fundamental and technical analysis into your trading, but in this video, we will be looking at three methods.
Method 1, Involves breakout trading with fundamental analysis, which capitalizes on training when a section breaks outside of its trading range.
Example A, the catalyst for range breakouts is usually due to the release of market data news events And where such data causes extra volume to come into a particular currency pair yeah and push it outside of a consolidation range into new highs or new lows depending on the nature of the release. Because data releases can cause extra market volatility, it is always wise to air on the side of caution when trading around such events. Previous support and resistance levels can be breached, and a great deal of uncertainty can enter into the market, and at this time, it is always advisable to use tight stop losses.
Example B, Once our support or resistance line, is breached on an economic data release we can assume that the market has taken the data in one of two ways, and in this example, we have a dovish stance towards the Canadian dollar and whereby this particular pair, the USDCAD, has reacted in a bullish direction. Therefore we have bad economic data coming into the market about the Canadian economy, and this is supported by a price action breaching the line of resistance and where price action subsequently moves in an upward direction and whereby we should only be considering a buy trade.
By planning around data releases, we can look for technical breakouts, adjust positions accordingly incorporating tight stop losses, and even utilize the data release to leave us in a trade in order to maximize profits. Remember, the art of trading is to latch onto trends because that is where the most amount of pips are to be gained.
Method 2 combines range-bound trading with fundamental analysis.
Example C, Range bound trading involves identifying a trend with the use of a couple of simple Lines, which show us support and resistance levels and areas where the price is likely to bounce off of the support or resistance in order to maintain the price action range.
Traders use the support and resistance lines to buy at the support line in an ascending trend and to sell at the resistance line in a declining trend. Example D, This example shows a chart with a strong bearish trend.
We do not want any news data release to potentially adversely affect our descending trend and interfere with our profitable trade. Therefore, ideally, we would look to not have open trades surrounding data releases, especially if they are potentially of a high impact nature. Therefore precautions should be taken to avoid trading around high impact news events, but if you find yourself in an open and profitable trade with a looming data release, which might be of high impact in nature, we suggest you close the trade, or partially close the trade, or insert tight stop losses in order not to reverse the profits you have made on a successful range bound trade.
Method 3, Using oscillators with fundamental analysis. Example E, Oscillators are often used in technical analysis. They are often used to establish overbought or oversold conditions. Here, in this chart, we can see one such oscillator, the RSI, or relative strength indicator.
Example F, By incorporating oscillators such as the RSI, we are easily able to identify areas where price action might reverse having been oversold or overbought, and if these coincide with support and resistance lines on our chats, we must be aware of this and be prepared to take the necessary action. However, should these also coincide with new data releases, we should give them extra emphasis because even if the data goes in line with our chart, and yet our charts are telling us that the market is overbought or oversold, we could see conflicting price action.
Therefore please take all of these into consideration when setting up your next trade and consider adopting some of these methods into your trading strategy. Remember that new data releases, especially of a high-impact nature, can cause extreme market volatility.