Forex Fundamental Trading

In the last article we took a look at what technical trading means in Forex market currency trading. This time we are going to look at the other type of trading method used by dealers which is fundamental trading.

We found that technicians look at where a currency has been, value wise against another currency, via charting, and this picture gives an idea of where the currency is now against where it should be according to changes in fundamental conditions. So, fundamental analysis deals with how economic conditions change a currency value along with events in the world at large. The technicians chart picture gives the trader clues about how the market may react in catching up with the market fundamentals affecting a currency against another currency. In terms of taking a position to exploit this catch-up phase, the trader has to try and work out how the currency might move in terms of timing and value between its current value and what the fundamentals say the value should be. Timing and correct position is key for the successful trader so some dealers trade using automated forex trading to help them enter and exit the market successfully. This saves them the hassle of spending constant hours manually analyzing the market every day.

The fundamental trading approach to Forex trading examines all of the relevant worldly factors affecting the exchange-rate between two currencies, in a trading pair, to determine the intrinsic value of a currency against another in the pair; and how that value may change in the near future. Factors can include 'pure' economic drivers such as GDP figures, liquidity, inflation, interest rates and so on; or other factors such as political issues and change, effects of natural disasters, war and so on which will affect economies and trade, and thus value of a currency. The intrinsic value is what the 'fundamentals' indicate one currency is actually worth against another currency in the market. If this intrinsic value is under the current market price, then the currency is overpriced and should be sold. If market price is below the intrinsic value, then the currency is undervalued and should be bought, this means that the market has to catch up with how the fundamentals 'out there' have affected the current value of a currency in a currency pair according to the current exchange rate in the market.

The sentiment of speculators and other hidden factors that may be working against the more obvious economic indicators can position an agreed value in the open market that seems at odds with what 'the market fundamentals' indicate that it should be; but the difference and the pressure brought on to correct that difference between the chart price and the price that economic condition would indicate. This brings opportunity for the trader to make a profit via the eventual correction when the market aligns with fundamental conditions dictating a value. The trader knows that eventually the market will come into line with the balance of fundamental factors. He does not always know how much of a change will occur and whether one fundamental factor might be neutralized of lessoned in effect by another as 'fundamental' conditions in the market can be many and different conditions can work in harmony to drive major value change or against each other to reduce or neutralize value change.

This method can mean that the market and economy must be closely followed on a daily basis to make successful trades. Some traders use a forex robot trading system to remove the need to constantly be watching the market and manually making trades. The computerized system is able to make many trades profitably which accumulate to create a high return.

Look out for the next article where we will look at why traders usually work with both systems.