Fundamental Trading Strategies in Forex Markets (Part I)
As a forex trader, use a combination of trading strategies in developing your forex system. This will reduce your risk and maximize pips for you. There are a few trading strategies based on fundamental analysis and others are based on technical analysis. You can use a fundamental trading strategy that is based on keeping on top of the global events for swing trading that may last from a few weeks to a few months.
Day traders and short term forex traders try to focus on only the economic news release of the week and how it will impact their trading. This works well for most of the traders. Learn forex nitty gritty, a trading method based on only 20 minutes trading a day.
Fundamental trading strategy based on macroeconomic events can make few thousand pips for you in a matter of a few weeks or months. You should not lose sight of the big macroeconomic events that may be bubbling in the economy or for that matter in world. Large scale macroeconomic events have the potential and ability of moving the forex markets big time for a long time.
The impact of big macroeconomic events has the potential to change the fundamental perception about a currency not only for a few days but for months and even years. Events such as wars, natural disaster, political uncertainty and international meetings have widespread physical and psychological impact on the currency markets.
Therefore, by keeping on top of the global developments, understanding the underlying market sentiments before and after these global events and trying to anticipate them could be very profitable for you. At least it can help prevent significant losses in your currency trading.
You may ask what type of big events affects forex markets in the short as well as long term. Major central bank meetings, potential changes to the currency regimes, possible default by large countries, G-8 Finance Minister meetings, important world summits, Presidential and Parliamentary elections in big countries, possible wars, FED Chairman semiannual testimony to the Congress. These are only a few examples of big macroeconomic events that make the currency markets jittery and nervous and may have a long term impact.
Lets illustrate it with an example, 2004 and 2008 US Presidential elections were hotly contested. Different candidates had opposing stances on the growing budget deficit, trade deficit and unemployment. There were differing views on how to deal with the recession engulfing the US economy. This made US Dollar bearish during the election campaigns.
G-8 meetings also leave a long lasting impact on the currency markets. Collectively these eight countries account for the two third of the world GDP. So whatever decisions that are taken during these meetings usually leave a short term as well as a long term impact on the global currency markets.
For example, the USD collapsed after the September 2003, G-8 meeting in which the finance ministers wanted to see more flexibility in the exchange rates. This meeting was also important as the US Trade Deficit was ballooning.
EUR/USD bore the burnt of the dollar depreciation. China and Japan intervened aggressively to stabilize their currencies. USD had already begun to sell off leading up to the meeting. The trend continued for many months after the meeting.
So, the long term impact of these macroeconomic events is much more significant that the short term impact and the event itself have the ability to change the overall market sentiments for a long time.
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