When you venture into the world of online currency trading, you will be faced with a decision: whether to use fundamental indicators, technical indicators or a combination of both to guide your trading activities.
There is a myriad of technical indicators out there, from the simple moving average to more complex systems. Examples are Bollinger Bands, the RSI and the Ichimoku Kinko Hyo charting system – which is in effect a combination of several technical indicators.
Fundamental indicators include factors such as the unemployment rate, inflation, interest rates, GDP and many more. In fact, anything that could possibly have an effect on the exchange rate of one currency versus another, can be used by an astute trader to cash in on possible price movements.
If one country has a negative trade balance, it will have an effect on the exchange rate of their currency relative to another nation’s currency. The same is true when there is a change in the relative interest rates between the two countries.
By now, it may be clear that to use fundamental indicators to guide your forex trading activities will mean watching the market very closely and reacting to everything that could possibly affect the value of your chosen currency pair.
The difficult part comes in giving a weight to a particular indicator, to decide to what extent a certain event or series of events will influence a specific currency.
You also have to take into account the possibility that, by the time you find out about the event, e.g. an interest rate hike, the market is already aware of this and the current price already reflects the new rate.
Many professional forex traders use fundamental indicators to guide their trading activities, but for a newbie trader it might simply be easier and less complex to stick to technical indicators.