Should You Trade Forex on Fundamentals

A long time ago, before most of us were born, and before the introduction of personal computers, fundamental analysis reigned as the only valid discipline in market following. Even in my college days in the late 80’s I had to argue with my finance professors over the validity of technical analysis. Today that is not so, as almost nobody dares to put in a trade before consulting charts first. Does that mean that now nobody pays any more attention to fundamental analysis, that it is dead and gone forever? No, not really.

If you do not believe me, turn your monitors on when big news hits the markets. Of course it is moving it, but if people really did not regard those economical inputs as valid, movements would be negligible. Just check how much has the market moved on Friday June 26th when the Personal Income data came out at 8:30 in the morning.

In a way, fundamental principles are underlying factors of long term trends, and thus can be used as a filter tool for trading signals received by technical analysis.
However, maybe the best way to use fundamental analysis is though the use of divergences. Divergences occur when for a prolong period of time both technical and fundamental analysis are pointing the same way, as had happened during the last year with both economical reports and trends revealing a recession and a bear market. But then suddenly, shortly after the release of important economical report, which results should cause continuation of the trend (on March 6th of this year Unemployment numbers came worse then expected which should normally be highly negative for the market), markets turn and change direction (Dow Jones Index and S&P500 both ended up on the March 6th), thus causing temporary divergence between two analysis.

People trading divergences in this example would buy the market on March 6th or shortly thereafter. Taking both fundamental and technical analysis in perspective, they reason that if bad news is not moving the market down, then odds of markets going higher are now worth taking, so when technical signal says buy, go for it.
In this particular example, fundamentalists would probably still be selling the market and losing money (market have moved much higher since March 6th), insisting that market should go down as a negative economical data is pointing that way. On the other hand, pure technicians would say that the market is always right so no use in fighting it – so, yes, they would take this trade and be positive. But also they would take many other trades, many of them with a low probability of ending profitably.

So, take your pick of how you want to follow the markets. And if you can make money on it, regardless of the discipline used, there will be always people that will want to hear about it.