In the past, we have gone over using technical analysis to understand the basics of trading. However, for those fairly new, you may be relying upon fundamental analysis, which utilizes economic indicators in order to get into quick profitable trades in the market. Now, with that in mind, here is why that will not work out for you. Trading purely based on fundamental analysis is not reliable on its own; however, if paired up with technical analysis it can serve as a powerful tool.
Fundamental analysis relies heavily on being able to position oneself at the right time and right price. Being unable to do so increases your risk, which should be avoided at all costs. As a trader in the markets, we cannot govern how the market reacts, or when it will react. Therefore, time is the master in this case.
Many rely on having an Economic Calendar to determine when news and data will be released. It is usually during the point when these are released that the market reacts momentarily to the news. Once the price has been factored in, you may have already lost precious pips checking through the right sources and making a decision on which entry to make.
SO WHAT’S THE RIGHT WAY?
Many of you may wonder, what exactly is the right way to approach news trading. Think of fundamental analysis as another tool that you will use in tandem with the many tools and skills you already have at your disposal. Treat it as such and no more than that. By using the technical analysis skills that you already have in order to determine key price levels and the trend, you will be able to determine when the market will make a movement.[row_inner_3] [col_inner_3 span__sm=”12″]
For instances, a majority of the time a market will come back into consolidation. However, for it to break out of its consolidating levels, there needs to be an imbalance of buyers to sellers on the market or vice versa. This imbalance is caused by the news. Bear in mind that the market is everyone that is buying or selling the security or instrument that you are looking at. This means that if there’s consolidation on GBPUSD, for example, and positive news or data is released favoring the Pound, you may see the pair break out of consolidation to the upside.
Another way to use fundamental analysis to your advantage is to think of the heavy news coming out of Central Banks, for example, as an atmospheric indicator. The news can give you an idea of whether the market is bullish or bearish and what investors intents may be. Depending on whether the Central Banks outlooks are “hawkish” or “dovish” may set the tone of the market for the quarter or half a year or even the whole year. With this information, you will be able to position yourself accordingly in accordance with the markets.[/col_inner_3] [/row_inner_3]