Fundamental Speed: The What and the How
Fundamental speed is the process of keeping track of key economic indicators that directly impact the currencies you trade, reacting to the release, and entering and exiting the position in a systematic way. Here is step by step overview on how the strategy works:
1. Focus only on high-impact economic releases.
Every day numerous economic reports are published globally but only a handful are really worth focusing and trading on. Large movements in currencies tend to occur when an economic release is tied directly to their rate of transfer in relation to another country's currency (One of the more important influences on the forex market are changes in interest rates, to learn more see Interest Rates Matter For Forex Traders)
Here are a couple of releases you should keep track of:
- Trade balance
- Interest rate statement
- Retail sales
- Home sales
- Consumer confidence
- Unemployment claims
Most economic calendars available online, such as Bloomberg's economic calendar, specifically highlight the high impact economic releases. For example, their economic calendar marks market moving events with a red star. This can be a handy tool when deciding which releases to focus on. (For more on trading news events, refer to Trading on News Releases)
2. Set a time limit to move in and out of the market.
Generally, after an economic release, a reliable price movement occurs for one to two minutes. Depending on whether the release met, fell below, or exceeded expectations you will see that the price typically reacts in the expected direction - but many times it moves in what seems to be a random direction after the first minute or two.
This is not so much a random movement as it is a government trying to stabilize its currency or a bank pushing money through to get the best transfer rate - things that are out of your control. If the release points and moves in the direction of the daily moving average, you may feel comfortable holding your position for up to five minutes. However, look at this on a trade-by-trade basis.
3. Do nothing in a neutral situation.
If the predicted or forecasted figure matched the actual figure, don't jump in to a trade just for the sake of trading. Trading this strategy only gives you a few trade options on any given day (less if you trade only one or two currency pairs) and there is a temptation to risk money in a neutral situation. It is important to trade according to a system rather than emotions. (Trying to eliminate emotions from a trade can be a difficult task, learn how you can overcome this in our article Master Your Trading Mindtraps)
More Probable, More Profits
As a forex trader it is important to making trades that have a high probability of success. Over time, by making trades that have a good chance of success typically you will have a higher overall return. Sticking to a system allows you to monitor your trades to determine which trades are not profitable and which are profitable. Two other key benefits of a fundamental speed strategy are:
1) Less reliance on charts and technical analysis.
As a beginner forex trader, technical trading will seem complex and difficult to read correctly. On the other hand, reading fundamentals (via economic reports) and reacting correctly can be done with more consistency and with more predictable results. As you become more accustomed to trading, you can blend fundamental speed and technical analysis to enhance your trading opportunities.
2) Ability to develop a systematic schedule.
For numerous traders, the hardest part of trading is deciding when they should trade. The timing of the economic reports allows traders to create a schedule and know exactly when they are going to trade. (Learn more about creating your own trading schedule by reading How To Set A Forex Trading Schedule)
Trading using a fundamental speed strategy can feel more intuitive for some traders as it relies on economic releases. But this is just one strategy out of many that you should consider in your arsenal as a forex trader. In the next section, we'll talk about the carry trade which is another strategy that is popular among traders.
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