Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
Fundamental and technical analysis as we already know are the two pillars of market analysis they are the ying and yang so to speak in the balance that is analysis. We know that traders use them separately and have found that people tend to lean heavily in one direction or the other, however they can both be used in conjunction with each other to provide a well rounded trading strategy.
We often compare the differences between fundamental and technical analysis, but by merging these two we can only stand to benefit. There is no hard evidence as to which style of analysis is superior and combining the two may lead to more definitive trade choices.
Fundamental data can offer us the directional bias for trading the broader market direction. When this data shows strong bullish potential we can avoid shorting opportunities in order to play the probability game and use our technical analysis to pinpoint entries on retracement and identify other factors that will help or hinder our trades.
There are many ways in which we can strategise or apply fundamental and technical analysis but today we will look at three tried and tested methods which have practical application within the forex market.
Method one involves Combining breakout trading with fundamental analysis.
The breakout trade strategy basically involves capitalising on a price moving outside of its predefined trading range. The catalyst for this is usually instigated by news events initiating market volatility. As we already know we should always air on the side of caution when trading surrounding times of news, as it could push price beyond our support or resistance levels which usually our stop losses are set just beyond.
So…How can we look to take advantage of these overreactions to news releases? We are basically looking to wait until a news release pushes price beyond a support and/or resistance level. once a test of either level is reached we could look to buy or sell accordingly. In other words we want the over reaction to the news to allow us to gain a advantageous position before the market is repelled by our prominent support or resistance level.
We can look to trade breakouts with any of the prescribed mechanisms of support and resistance, the hope is that high impact news releases could bring in the necessary volatility to either trigger our positions into the trade or move an existing trade closer to the our take profit target.
Additionally if we have captured the majority of a move and our trade is doing well, we could set a tight stop loss in anticipation of news to capture a potential break out beyond where we would ordinarily expect the market to turn around.
Method number two!
Method two involves Combining range bound trading with fundamental analysis!
Range bound trading involves identifying a price channel of any given market, a trader uses the support and resistance lines to buy at the lower trendline support and sell at the higher trendline resistance.
This example shows a chart with a strong bullish or upward trend. When trading a strong up-trending market, we are looking to enter our trades at the lowest possible level to maximise profits within this strategy, as it is a uptrend we do not generally sell at the top as this defies the trend and invites bad trading decisions. Drawing our trend lines helps identify future potential price levels in which we may seek to enter the market.
Now fundamentally speaking, news events can interfere with our range bound market. Ideally we would like to avoid having open trades surrounding the times of high impact news releases as they can force price beyond the range. Using this range bound technical analysis in conjunction with fundamental high impact news release avoidance, can serve to help you being unnecessarily surprised as well as avoid losses due to being stopped out.
Method number 3 Using oscillators with fundamental analysis!
Oscillators are a widely used in technical analysis they are some times used to evaluate short-term overbought/oversold conditions.
Here in this chart, We can see an example of the technical analysis tool the RSI indicator. In this method we are using it in conjunction with the Non-farm Payroll news release which would be our fundamental indicator.
one of the most significant fundamental indicators is the NFP figure and in this example it was lower than the estimated expectation. This in turn caused the U.S Dollar to weaken significantly as shown by this strong bullish price move on the EUR/USD pair.
So the two factors to consider here are firstly the RSI indicator signifies that the market is oversold but additionally it is so along a prominent support line.
Secondarily the news surrounding the non farm pay roll resulted negatively for the US Dollar. All of these conditions provided the perfect circumstances for a bull run and reading the market using both technical and fundamental indicators would have allowed you foresee and seize this opportunity as it arose.
These three strategies are not simply conjecture but tried and tested strategies. You can apply them to real life market conditions as and when they occur safely using a demo account, or you can look back over historical data in the markets and apply them to see if you are seeing the bigger picture and anticipating the markets correctly.
Don’t forget that during times of high impact news releases markets can be extremely volatile and unpredictable at times. It will be ultimately be down to you wether you look to engage or avoid volatile markets, however you can not avoid being caught out by high impact news if you are totally unaware or uninterested in fundamental events.
Now take some time to think about these strategies, how they apply to the forex markets and you may apply them in future, please sit back and contemplate what you have learned today and remember Contemplation is the key to learning.