Generally speaking, there are two camps of believers among forex traders. Some believe the best way to trade is to exclusively follow technical trends, while some others believe trading decisions should be based on fundamental trends. Anyway, what is technical trading and what exactly is fundamental trading? Technical trading is the art of taking forex trading decisions on the basis of the chart patterns, indicators and price actions as seen on the broker's platform. While fundamental trading on the other hand is taking trading decision based on economical data, events, statements and general speculations. Now the question is which of the two trading styles is safer and more sensible to use. In order to take an informed decision, let's look at the pros and cons of each of the trading styles.
To start with, market directions and moves are actually driven by the news. So they are real time indicators of price movements. However, there are a number of downsides to fundamental trading:
1. Volatility: Trading the forex market during news or data release period could be very difficult due to the level of price volatility at this time. Very often the price of the affected currency pair is driven up and down like a boat caught in the raging sea because the trading volume as at then is usually low. Institutional traders and other large volume professional traders normally step aside so they can take their time to figure out the implications of the figures and their risk outlook. In fact, usually, the market would already have priced in the data before you get the figures from the traditional sources, so slippages and whipsaws are also common at this time.
2. Subjectivity: Another reason fundamental trading may not be advisable is that economical data are often subjected to subjective analysis: There are usually multiple perspectives by market players. For instance, even when the non-farm pay roll actual data exceeds the forecast significantly, some analysts will sometimes compare that with unemployment rate and some other labour data before they make an inference.
3. Complexity: The global economy is so interwoven that the economic situations of various nations have effect on one another. This makes the situation complex because it is not enough to focus on the data that directly affects the currency pairs you are trading alone. This is apart from various statements and events that complicate the issue.
Conversely, technical trading is the logical means by which the pattern created by the complex market psychology is traded. The major downside to this trading style is that you don't get to have a broad outlook and logical explanations for price movements. However, technical trading has a load of advantages:
1. Technical trends, patterns and indicators unlike their fundamental counterparts are not virtual; they are easy to read and follow, even for a novice trader.
2. With proper understanding of time frame analysis, it's easy to know what the market has been doing, what it's doing right now, and exactly where and when to get on board.
3. Technical trading affords you the privilege to determine when a particular trend has reached the top or bottom. Similarly, through the knowledge of technical pattern, it's easy to know if what you have is a continuation pattern, a correction, retracement e.t.c. You can also know precisely how far a move will advance, and sometimes you can tell when a move will begin.
We could go on and on about technical trading, but I believe you'll agree with me that it appears to be the better way to trade. However, it's best not to totally neglect any of the two styles. While we could spend a substantial part of our trading time watching the charts, it's also very good to keep an eye on the news releases, speeches, and events to ensure we don't have a myopic view of the market. In fact, in my experience, the chance of having a successful trade significantly increases when both the technical and fundamental indicators are in harmony.
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