The Forex News Trade: Proof that Fundamental Analysis Does Matter

Why Fundamental Analysis When I Can Just Trade the News?

Why should you analyze the fundamentals of an economy when you can simply trade the news releases? It is a valid question. However, getting into a Forex news trade without any prior knowledge or understanding of the fundamental economic data that backs the currency in question is like trying to drive at night in pitch black. You might be OK for a few miles but you will eventually crash. Whether day trading or trading futures, understanding news releases and fundamental economic data is crucial.

Let’s take an example. At one point during the crash U.S. unemployment numbers were dismal bordering on horrendous. However, despite negative news being released, the USD rallied against the EUR and other currencies. You would have stared in shock and not understood why you were on the wrong side of the trade if you had only looked at the numbers. You wouldn’t have figured out what was going on until you searched around and by that time you probably would have lost a sizable portion of your capital.

What happened? Simple. While the numbers were negative, in relation to previous months the level of job losses had dipped considerably which many analysts took as a sign of an economic recovery being around the corner. It doesn’t matter whether they were right or wrong since the short term movement of the USD was to rise. After all, when you are in a Forex news trade you are less interested in the long term movement as most news trades are intra-day trades. In fact, a lot of trades based on the news don’t last more than a few hours and in many cases not more than a few minutes.

So, you see how a lack of understanding of the underlying economic factors would have led you to go short when you should have been long? On the other hand, if you had done your homework on the U.S. economy you would have known what to expect.

Why Isn’t Technical Analysis Enough?

The problem is that, even if you aren’t interested in getting into a Forex news trade, the large number of news releases affects the market continuously. Therefore, you have two choices. You either avoid trading altogether during data releases, which means that you could end up trading once a week or less, or you learn how to use the news to your advantage.

The problem is that the impact of economic data usually leads to extreme volatility and these movements can wipe out an account in a few trades. So, if you aren’t aware of the releases and what they signify you can be caught on the wrong side of a trade and have no idea why you are suddenly losing money when all your technical indicators showed that you should be making a profit.

Many traders focus on technical analysis and try to cover a high number of currency pairs at once in an attempt to identify multiple trading opportunities. However, this is the wrong approach because it is wiser to master one or two currency pairs from both a technical and a fundamental viewpoint and you will find that you have plenty of trading opportunities. When you have truly mastered one pair, meaning that you show consistent profit, then you can move on to another. However, remember that you cannot expect to master a Forex news trade without fundamental analysis.

Related posts:

1. Forex News Trading
2. Forex Trading: News and Its Impact on the Currency Market
3. Foreign Exchange Trading and Economic Data
4. Forex Guides: Learning to Trade
5. Scope and Advantages: Forex Technical Analysis
6. The Forex Market Trade: The Pitfalls of Indicators