Technical vs Fundamental Analysis - Which is Best?Last week, as part of my "building a trading system" series, we added the RSI indicator which is pretty obviously a technical indicator. It is based upon previous price data and is intended to help us determine whether a currency is over-bought, or over-sold. I know, you're wondering why this guy that states on his website "fundamentals are what really drives currency prices" is showing us how to use technical indicators. It's About Trading the OddsOn the Home page of this website I told you that successful Forex trading involves using the law of probability and swinging the odds in your favor. Technical indicators are tools we use to help us determine these odds.Profits in currency trading come from correctly anticipating which direction the price for a currency pair is going to move. We jump on that train, ride it until we feel that move is done and then we jump off. How do we know which way prices are going to go? We don't. Nobody knows for sure. That's why we use input from various sources to help us make our decision. Market SentimentMost of the transactions conducted in Forex, the real "meat" of the market, are between the largest financial giants of our planet. Do you really believe these guys (or gals) care if the RSI is maxed out on the 60 minute chart and they need to exchange a couple of billion EUR/USD for GM's European payroll? Not for an instant.However, as speculative traders, we have no way to know about impending inter-bank transactions and have to rely on what we do know. This is why we use technical indicators. When you look at the TI's on your charts you'll see that often, not always but often, they max out before the price changes direction. This is one of the slight odds we can use. Does this mean the price won't go higher because all your TI's are busting through the top of your screen? Don't kid yourself. The Real MarketThe real Forex market couldn't care less about TI's or interest rates. It's simply a business transaction, necessary because of international trade.If we review the Players we know that there are a significant number of traders that do follow their indicators and others that trade based upon the fundamentals. Our goal then is to try to determine their "likely" direction, using the resources available, and allowing the probabilities to do their job. How do we do this? We use technical sentiment indicators and news releases. These are some of the edges we have to help us swing the odds of success in our favor. Technical vs Fundamental analysis? We need them both. Wishing you trading success, |