Online trading in the foreign exchange market takes mental focus and strong discipline, not to mention time and commitment. While it’s always important to analyze technical factors and develop your own trading plan, it’s also important to understand the fundamental economic forces that drive the market. From Federal Reserve monetary policy through to national interest rates and inflation data, keeping up to date with economic trends can provide you with key insights and help you to develop a solid trading strategy.
Fundamental analysis vs technical analysis
There are many ways to trade forex, with most strategies broken down as either fundamental analysis or technical analysis. Fundamental analysis attempts to look at the intrinsic value of a currency, and the intrinsic relationship of a currency pair through the analysis of economic data. For example, traders will look at things like interest rates, jobs growth, stimulus packages, and inflation figures.
In contrast, technical analysis attempts to gather information from the charts alone, with pattern recognition strategies, indicators, and support and resistance levels used to forecast short to medium-term price movement. While both forms of analysis involve a form of prediction, fundamental analysis typically looks at wider and longer-term economic trends.
Fundamental analysis for 2018
A range of fundamental factors are expected to influence the currency markets in 2018, including Federal Reserve interest rates, European regulatory framework decisions, and the ongoing boom of cryptocurrency assets. While it’s always difficult trying to forecast the dynamic forex market, understanding fundamental trends can help you get ahead of the curve.
The US Federal Reserve
The decisions made by central banks are crucial to forex market movements, with the US Federal Reserve the biggest and most significant player. Whether the Fed continues to tighten monetary policy will depend on inflation figures, with higher inflation likely to lead to a rising USD in anticipation of rate hikes.
The European Central Bank and regulatory framework
The situation in Europe will also have a huge effect on the forex market in 2018, with the European Central Bank still very cautious, interest rates still negative, and inflation almost non-existent. While it’s still hard to imagine rate hikes in European countries, regulators have started taking serious steps to tighten control over the forex industry.
The new MiFID II directive will provide a new level of protection and transparency to forex traders, including negative balance protection, the introduction of a universal margin closeout percentage, trade leverage limits, and the elimination of bonus programs.
The Reserve Bank of Australia
On the local front, the Reserve Bank of Australia don’t seem interested in further tightening measures, with weak economic data stubborn in the face of low-interest rates and inflation. While the attitude that the Reserve Bank has to the Australian dollar does have a significant effect on the forex market, the relationship between interest rates and currency price can be volatile and hard to interpret due to technical factors and wider global conditions.
The growth of cryptocurrencies
The rapid growth of cryptocurrencies will also affect the forex market in 2018, as blockchain technology gets integrated into established markets and trading channels. Cryptocurrencies are already available for trading at many respected brokers, with AvaTrade and other forward-thinking companies only likely to expand their cryptocurrency options as the year progresses.
Trading strategies in 2018
A number of trading strategies take advantage of fundamental economic data, including short-term news trading and a range of long-term holding strategies. News trading involves taking short to medium term positions immediately before or after a major news announcement, with traders making their decisions based on the expected impact of fundamental economic reports. While this type of trading can be very profitable when done right, it can also be risky due to fast movements and unexpected slippage. Generally speaking, fundamental analysis is more likely to involve medium to long-term holding strategies that last anywhere from a few days to a few years.
Mechanical fundamental strategies vs trend following
In its purest form, fundamental trading using economic reports and data is almost a mechanical strategy. While some traders are known to use their intuition or combine fundamental and technical indicators, most fundamental strategies are based on the recording and interpretation of cold hard facts. This kind of approach is very different to trend following, which involves recognising a pattern, jumping on a perceived trend, and riding the wave for as long as you can. While trend following can also be profitable under certain conditions, traders are always at risk of chasing and lagging behind price when trends are followed without respect to market fundamentals.
While the forex market is far less affected by economic fundamentals than stock markets, it’s still important to be aware of market fundamentals and upcoming news announcements. Even if you choose to take a contrary position and don’t want to be aligned with central bank decisions, fundamental factors do move the markets.
While it’s almost impossible to forecast the timing and impact of news announcements, remaining ignorant of fundamentals is a bad decision for even the most technical of traders. Regardless of your trading style and personal preferences, Avatrade offers a complete solution for the modern forex trader.
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