Fundamental Trading Strategy (Part I)
While trading forex, you can use many strategies in developing your forex system. Some strategies are based on fundamental analysis and others are based on technical analysis. You can use fundamental trading strategies based on big macroeconomic events for swing trading that may last from a few weeks to a few months.
Short term forex traders and day traders try to focus only the economic news release of the week and how it will impact their day trading. This works well for many traders. Learn forex nitty gritty, a method based on only 20 minutes trading a day.
But it is also important that you don’t lose sight of the big macroeconomic events that may be brewing in the economy or for that matter in world. Large scale macroeconomic events have the potential of moving the currency markets big time.
The impact of big macroeconomic events have the potential to change the fundamental perception about a currency for months and even years what to talk of days. Events such as wars, political uncertainty, natural disaster and international meetings have widespread psychological and physical impact on the currency markets.
Therefore, keeping on top of the global developments, understanding the underlying market sentiments before and after these global events and anticipating them could be very profitable for you. At least it can help prevent significant losses in your trading account.
You may ask what type of big events affects the currency markets in the long term. Important world summits, major central bank meetings, potential changes to the currency regimes, possible default by large countries, G-8 Finance Minister meetings, Presidential and Parliamentary elections in big countries, possible wars, FED Chairman semiannual testimony to the Congress. These are only a few examples of big events that make the currency markets jittery and may have a long term impact.
For example, 2004 and 2008 US Presidential elections were hotly contested. Candidates had different stances on the growing budget deficit and how to deal with the recession engulfing the US economy. This resulted in the overall USD bearishness.
For example, the USD collapsed after the September 2003, G-8 meeting in which the finance ministers wanted to see more flexibility in the exchange rates. This meeting was also important as the US Trade Deficit was ballooning.
EUR/USD pair bore the burnt of dollar depreciation. Japan and China intervened aggressively to stabilize their currencies. US Dollar had already begun to sell off leading up to the meeting. The trend continued for many months after the meeting with the EUR/USD pair.
So, the long term impact of these macroeconomic events is much more significant that the short term impact and the event itself have the ability to change the overall market sentiments for a long time.
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