How to Trade Forex Without Using Indicators
August 31st, 2009
Most FOREX traders rely on technical analysis and indicators when planing their trading strategy. This article will discuss how to trade forex without using indicators and instead use fundamental analysis. After reading this article you should have a better understanding of fundamental analysis and how to use it as part of your FOREX strategy.
Political and economic changes are the basis of fundamental analysis. These can frequently affect currency prices. Traders that take advantage of fundamental analysis will gather their information from a variety of news sources.
Unlike technical analysis where those focus is on technical indicators and charts formations, Fundemental Analysis focuses on events that can have a dramatic effect on the direction of the currency markets. Traders are looking for information about unemployment forecasts, political ideologies, economic policies, inflation and growth rates.
Fundamental analysis will provide you with an overview of currency movements and a broad picture of the economic conditions. Many traders then combine their fundamental analysis with technical analysis to plot actual entrance and exit points as well as confirming the information provided by their fundamental analysis.
The FOREX market, like any free market, is controlled by supply and demand. Many economic factors can affect the balance between supply and demand. However, in the Forex currency market the two most critical ones are interest rates and the strength of the economy. The overall strength of the economy is affected by changes in the GDP, trade balances and the amount of foreign investment.
There are also many economic indicators released by government and academic sources. These indicators are usually released on a monthly basis but will sometimes be released weekly. These are pretty reliable measures of economic health and are closely followed by all fundemental traders.
Again for Forex traders some of the most important and commonly followed are : interest rates, international trade, CPI, durable goods orders, PPI, PMI and retail orders. Interest Rates, in particular, can cause a currency to swing dramatically either up or down.
In some cases, high interest rates will attract foreign money, however high interest rates will frequently cause stock market investors to sell off their portfolios and this will spill over into other markets like the Forex. They do this believing that the higher cost of borrowing money will adversely affect many companies. If enough investors sell of their holdings in can cause a downturn in the market and negatively affect the economy.
International Trade – If there is a trade deficit (more items imported than exported) it is usually considered
a negative indicator. When there is a trade deficit it means that more money is leaving the country to buy foreign goods than is entering the country and this can have a devaluing effect on the currency. Usually though trade imbalances are already factored into the market consideration.
If a country normally operates with a trade deficit then there should not be an affect on the currency price. The currency price will normally only be effected by trade differences when the deficit is greater than the market expected.
The measurement of the cost of living (CPI) and the cost of producing goods (PPI) are a couple of other important indicators. You should also watch the GDP which measures the value of all the goods produced in a country and the M2 Money Supply which measures the total amount of currency for a country.
In the US alone, there are 28 major indicators, these can have a strong effect on the financial market and should be closely watched. This information can be found many places on the internet and is provided by many brokers.
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