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Prices Do not Move in Line With the Facts!
Submitted by Tradervox on Mon, 18/04/2011 - 18:57
How many traders trade breaking news stories and believe the above? Loads and they are all going to lose. If you are using forex fundamental analysis you can but you must be aware of one key fact and factor it in to your forex trading strategy and its this...
Forex Fundamentals don't move to the facts - they move to how investors perceive the fasts and this means trying to trade breaking news is doomed to failure.
This is obvious if you look at the past fact:
Markets rally when there most bearish and crash when there most bullish. We all have the same facts to look at but you me and millions of other traders draw our own conclusions from these facts.
We all have them now at the click of a mouse and institutional investors have no advantage, as they did in years gone by.
So how do you trade the fundamentals?
You can trade them and here you have to understand and humans behave and think.
Human psychology on the whole is ruled by greed and fear and they will always push prices to far up or down, in relation to these emotions, prices then break, return to fair value and then the same pattern repeats again and again.
This is obvious from any forex chart and short term price spikes never last.
Most savvy traders look at the big long term fundamentals that drive price and then use technical indicators to detect overbought and oversold levels to enter trading positions and take profits.
This is an effective way of trading as the long term fundamentals in forex markets last for months or even years. The reason for this is the currency reflects the underlying economic cycle of the country they represent and these cycles last for months and years.
You can of course just use forex charts, as they take into account the fundamentals as well.
All they assume is that all known fundamentals will show up in price action and they also measure psychology as well, as human behaviour shows up in repetitive price patterns on the chart.
For most forex traders using forex charts is time efficient and means you trade the reality as it is with no guessing and you are seeing all the facts and more importantly, what investors think of them right before your eyes.
So don't be tempted to trade breaking news stories or listen to all the convincing analysis you hear from experts -there just stories and cannot be traded.
Will Rogers once famously say:
" I only believe what I read in the papers"
He was joking of course but how many traders read a news story and try and trade it. So no matter how convincing the news is remember - it's not the news itself that's important, you need to look at human psychology.
Forex fundamentals analysis is hard on its own and doesn't give you the whole picture, so trade the reality you see on a forex chart and you will not only see the fundamentals but how they are perceived all at the same time.