What is fundamental analysis?
Fundamental analysis uses the economic conditions and other events to predict the future price of a currency pair. It concentrates on economic, social as well as political events that drives supply and demand. The fundamental traders use events such as growth rate, interest rates, unemployment, as indicators to predict future price movements. They analyze the past and present underlying conditions of currencies, for which they always have to be aware of the fundamental changes happening all around the world daily.
Currency prices move primarily based on the supply and demand theory. That is, on the most basic level, the value of currency rises because there is demand for that currency, the value of currency decreases when there is excess supply. Supply and demand is very crucial for predicting future movements, but forecasting supply and demand is not that easy as several other factors cause supply and demand.
What is technical analysis?
Technical analysis centers on the study of price movement. Technical analysts use historical currency data to predict the future price. They believe that all the current market information is reflected in the price of each currency pair, therefore studying the price action is all that they require to take trade decision. They also believe that the price patterns repeats itself and hence take trade decisions based on it. Technical analysis is a common analysis method for short-term to medium-term traders.
It works exceptionally well in the currency markets because human emotions or market perceptions primarily drive short- term currency price fluctuations. Charts are used to identify trends and different patterns to find profitable entries. The most basic concept of technical analysis is that markets are always going to trend. So being able to identify trends in their earliest stage of development is the key to technical analysis. The technical analysis combines price action and momentum to construct a graphic representation of past currency price action to predict future performance.
Now that you have understood about the technical as well as fundamental analysis let us see how major news affects the technical analysis. Different news events have a disparate impact on the price of a currency pair based on the type of news. Some news has a more substantial effect on the price, and some have a negligible impact on the price.
News that have high impact on price movements
1. Employment data (unemployment, employment change, NFP)
2. Economic data (GDP,CPI,PPI)
3. The policymakers and speakers (Trump’s speech, Draghi’s speech, other speakers)
If you are a day trader, then it becomes essential for you to look after the high impact news releases as it may affect your trading account drastically. In some pairs, the high impact news causes the price movement of about 100 pips (most GBP pairs ). So we suggest you to not enter into trades at least an hour before and after the news or during the news. If you are already in a trade, then close the trade or use a stop loss at a significant level as per your trading system.
If you are a swing trader, it will not always affect you because only few news can change the trend of the market. Most of the time the price goes against the trend and get back in the trending direction again. We still suggest you use a proper stop loss during the news. Also, try not to enter a trade during news as price may hit your stop loss and make you lose money.
No matter how perfect a setup looks to you, it can fail if the news data comes inappropriate to your setup. Let us assume you found an ideal bullish reversal setup on USD-JPY pair, and high impact news is about to release on USD. Now if the data came out to be bad for the US dollar, then it suggests that USD is about to lose its strength over other currencies. The setup which you thought was perfect fails as there is no strength in the US dollar to rise due to its bad economic data and the price goes against you.
It is essential for a technical trader to be aware of the fundamental news which is about to take place, So if there is high impact news scheduled nearby, try not to position yourself into a trade as it may make you lose money. The market is full of opportunities and has much potential. Moreover, your life is not going to end if you let go of one trade also if you miss one trade another one comes because the price in forex always moves and gives you another opportunity.