Forex Trading Rules: Trigger Fundamentally, Enter and Exit Technically
AAA
  1. Forex Trading Rules: Introduction
  2. Forex Trading Rules: Never Let a Winner Turn Into a Loser
  3. Forex Trading Rules: Logic Wins; Impulse Kills
  4. Forex Trading Rules: Never Risk More Than 2% Per Trade
  5. Forex Trading Rules: Trigger Fundamentally, Enter and Exit Technically
  6. Forex Trading Rules: Always Pair Strong With Weak
  7. Forex Trading Rules: Being Right but Being Early Simply Means That You Are Wrong
  8. Forex Trading Rules: Know the Difference Between Scaling In and Adding to a Loser
  9. Forex Trading Rules: What Is Mathematically Optimal Is Psychologically Impossible
  10. Forex Trading Rules: Risk Can Be Predetermined; Reward Is Unpredictable
  11. Forex Trading Rules: No Excuses, Ever

Forex Trading Rules: Trigger Fundamentally, Enter and Exit Technically

by Boris Schlossberg and Kathy Lien

Should you trade based upon fundamentals or technicals? This is the $64 million question that traders have debated for decades and will probably continue to debate for decades to come.

Technical Analysis Vs. Fundamental Analysis
Technicals are based on forecasting the future using past price movements, also known as price action. Fundamentals, on the other hand, incorporate economic and political news to determine the future value of the currency pair.(For more, check out our Technical Analysis Tutorial and our Fundamental Analysis Tutorial. )

The question of which is better is far more difficult to answer. We have often seen fundamental factors rapidly shift the technical outlook, or technical factors explain a price move that fundamentals cannot. So the answer to the question is to use both. Both methods are important and have a hand in impacting price action. The real key, however, is to understand the benefit of each style and to know when to use each discipline. Fundamentals are good at dictating the broad themes in the market, while technicals are useful for identifying specific entry and exit levels. Fundamentals do not change in the blink of an eye: in the currency markets, fundamental themes can last for weeks, months and even years.

Using Both to Make a Move
For example, one of the biggest stories of 2005 was the U.S. Federal Reserve's aggressive interest rate tightening cycle. In the middle of 2004, the Federal Reserve began increasing interest rates by quarter-point increments. The Fed let the market know very early on that it was going to be engaging in a long period of tightening and, as promised, it increased interest rates by 200 basis points in 2005. This policy created an extremely dollar-bullish environment in the market that lasted for the entire year.

Against the Japanese yen, whose central bank held rates steady at zero throughout 2005, the dollar appreciated 19% from its lowest to highest levels. USD/JPY was in a very strong uptrend throughout the year, but even so, there were plenty of retraces along the way. These pullbacks were perfect opportunities for traders to combine technicals with fundamentals to enter the trade at an opportune moment.



Fundamentally, it was clear that the market was a very dollar-positive environment; therefore, technically, we looked for opportunities to buy on dips rather than sell on rallies. A perfect example was the rally from 101.70 to 113.70. The retracement paused right at the 38.2% Fibonacci support, which would have been a great entry point and a clear example of a trade that was based on fundamentals but looked for entry and exit points based on technicals. (To find out more on Fibonacci numbers look at Fibonacci And The Golden Ratio.)

In the USD/JPY trade, trying to pick tops or bottoms during that time would have been difficult. However, with the bull trend so dominant, the far easier and smarter trade was to look for technical opportunities to go with the fundamental theme and trade with the market trend rather than to trying to fade it.

Forex Trading Rules: Always Pair Strong With Weak

  1. Forex Trading Rules: Introduction
  2. Forex Trading Rules: Never Let a Winner Turn Into a Loser
  3. Forex Trading Rules: Logic Wins; Impulse Kills
  4. Forex Trading Rules: Never Risk More Than 2% Per Trade
  5. Forex Trading Rules: Trigger Fundamentally, Enter and Exit Technically
  6. Forex Trading Rules: Always Pair Strong With Weak
  7. Forex Trading Rules: Being Right but Being Early Simply Means That You Are Wrong
  8. Forex Trading Rules: Know the Difference Between Scaling In and Adding to a Loser
  9. Forex Trading Rules: What Is Mathematically Optimal Is Psychologically Impossible
  10. Forex Trading Rules: Risk Can Be Predetermined; Reward Is Unpredictable
  11. Forex Trading Rules: No Excuses, Ever
RELATED TERMS
  1. Asset Liquidation Agreement (ALA)

    A contract between the Federal Deposit Insurance Corporation ...
  2. Capital Loss Coverage Ratio

    The difference between an asset’s book value and the amount received ...
  3. Gross Cash Recovery (GCR)

    The gross cash colloctions expected over the remaining life of ...
  4. Initial Targeted Cash Value

    The gross amount of collections expected to be obtained through ...
  5. Liquidation Differential

    The loss in value of an asset after it has been placed in receivership ...
  6. Asset Management and Disposition Agreement (AMDA)

    A type of contract between the Federal Deposit Insurance Corporation ...
  1. How do I implement a forex strategy when spotting a Stick Sandwich Pattern?

    Learn about the stick sandwich and how to use this reversal pattern in conjunction with other technical indicators to create ...
  2. How do traders and analyst create profitable Swing Trading strategies in forex?

    Learn how to create a profitable swing trading strategy in the forex market using price channels on bullish, bearish and ...
  3. How do I use a Turtle Channel to create a forex trading strategy?

    Learn two simple forex trading strategies, one trend trading strategy and one swing trading strategy, that can be implemented ...
  4. How do I implement a forex strategy when spotting a Tri-Star Pattern?

    Learn about the tri-star pattern and how to use this reversal signal in conjunction with other technical indicators to create ...

You May Also Like

Related Tutorials
  1. Active Trading Fundamentals

    Introduction to Stock Trader Types

  2. Forex Fundamentals

    Investopedia's Forex Outlook For November 2012

  3. Forex Fundamentals

    Investopedia's Forex Outlook For October 2012

  4. Economic Calendar

    Investopedia's September 2012 Forex Outlook

  5. Economic Calendar

    Investopedia's Forex Outlook For July 2012

Trading Center