Simple, straightforward ideas for combining fundamental and technical analysis
The majority of experienced (and by association) successful traders, will always suggest that you require a combination of both fundamental and technical analysis in order to trade the: FX, equity and commodity markets proficiently. Traders quickly learn that FX markets primarily move, due to the fundamental economic metrics, relating to the currency of the country in question.
For example; if a release for the USA economy reveals that inflation has risen significantly, orthodox analysis suggests that the USD might rise, as traders begin to speculate the Fed might encourage the FOMC to raise the interest rate of the U.S. economy, to prevent inflation rising further. Therefore, investing in the dollar becomes more attractive, as it potentially gives a higher return versus other currencies.
This same pattern; of fundamentals impacting on the value of the USD, is repeated for other key economic releases and publications, such as: employment/unemployment numbers, interest rate adjustments, government bond buying programmes, central banks press conferences, sentiment readings, Markit PMI numbers, house prices and home building stats. etc.
Whilst we accept these metrics all have the power to move our FX markets, combining the data with technical analysis, can often lead to confused behaviour amongst traders, as they fail to realise how technical analysis can be used to compliment fundamental economic releases and events. Retail FX traders can allow the technical analysis to overpower their decision making, rather than using it appropriately and conservatively, to support rational thinking.
Technical analysis can become a self fulfilling prophecy; if enough traders place orders at a certain level through technical analysis decision making, then the market may react to that price level. However, it must be noted that retail trading accounts for circa 8% of FX trading, the majority of FX trading is conducted by banks, to hedge positions for their commercial clients, in order to smooth out transaction costs. It isn’t conducted for traders to bank speculative profits.
Therefore, if it’s institutional traders who move the FX market, they’re unlikely to pull up a 10 minute time frame/chart on EUR/USD and overlap the: DMI, RSI, MACD, ADR, PASR, stochastic lines, etc and make decisions based on such a combination of technical indicators being triggered. FX traders, who are trading huge size on a daily basis, simply don’t trade in such a manner.
Large trading banks might have traders in the firm who place orders at key levels, known as “handles” or “round numbers”, they may pay attention to certain technical indicators on the daily or weekly time frame. And they probably will pay attention to the daily support and resistance levels. Therefore, retail FX traders face a challenge which becomes a lot more straightforward, once they clear their charts of unnecessary clutter and concentrate on where and why price action occurs.
It’s worth walking through a recent high impact news release, to illustrate how fundamental and technical analysis can be combined. On Wednesday January 30th, the FOMC announced that the interest rate for the USA would remain unchanged at 2.5%. But during the subsequent press conference held by the Fed Chair Jerome Powell, he put forward a more dovish policy, suggesting that the Fed/FOMC would not be aggressively raising the key interest rate during 2019, instead they’d be influenced by inflation and the overall performance of the U.S. economy.
As this news broke the U.S. dollar slumped, versus the majority of its peers. Major currency pairs, in which the USD is the base currency, sold off sharply as institutional banks and other market movers reversed their view that the FOMC would target a 3.5% interest rate in 2019. In one move the Fed/FOMC appeared to have quietly, but efficiently abandoned their previous commitment of “normalisation” in 2019.
This sell off mightn’t have appeared on the 10 minute chart referenced earlier, the lagging technical indicators might not have aligned to warn traders of the rapid move. It must also be noted that there are few indicators that could be regarded as leading rather than lagging indicators and the primary leading indicator is price.
Focusing on USD/CAD, price slumped through the three levels of support during the Fed Chief’s press conference and then appeared to stop, as the trading session faded. The currency pair fell by circa 0.9% from the high of the day. But then met resistance, once it had crashed through the third third level of support. Price appeared to arrest at 1.3100 and at 12:00pm U.K. time the following day, USD/CAD was trading close to flat on the day. It’s at this point traders can take a rational view on what’s occurred.
The high impact news event and release caused the greenback to slump versus one of its major peer currencies, CAD. The slump was outside of the average range the pair had recently experienced, it fell sharply through S3, but stopped short of falling through the key handle and round number of 1.3000, an area where many; buy sell and take profit limit orders, might be placed.
This is just one simple and straightforward example of how fundamental events drive our FX markets and how technical analysis can impact on the limits fundamental calendar events has. Individual traders would be advised to always consider both phenomena, whilst developing their analysis skills, to ensure they’re aware of how both factors always combine, to move FX markets.
« U.S. equity markets rally, whilst USD fades, as the Fed Chair Jerome Powell indicates a reversal of monetary policy. The latest NFP numbers and the unemployment rate for the USA, could move the FX market for the USD, when released on Friday 1st »
