Retail Forex trading can generally be broken down into two main types, technical and fundamental. Technical Forex trading is based on chart analysis; identifying levels at which price has reacted in a particular way in the past, and trading the assumption that it will do so again. Fundamental Forex trading is entering and exiting the market based on the fundamental economic qualities of a country, often using that country’s data releases as basis for analysis.
While neither can really be proven to be more or less reliable than the other, there are some distinct differences in the way you should trade both types of approach.
Technical Forex Trading
Technical Forex trading, as already mentioned, involves identifying levels at which price might act predictably. This could be support, from which price might reverse to the upside; or resistance, from which price might reverse to the downside. In both instances you would trade in the direction of the expected response, and exit if price breaks the level you are trading and the expected response does not occur. Technical Forex traders might look for patterns, or setups, which can also hint at what price might do next. A continuation pattern, for example, is a group of candlesticks that indicates that price will continue moving in the direction of the trend. A reversal pattern, the same, but the group indicates that price might reverse if the pattern completes. When trading using technical analysis you can set your parameters based around strict rules, and let price validate, or invalidate your expectations.
Fundamental Forex Trading
Fundamental Forex traders, on the other hand, wait until a piece of data is released that involves a currency they are looking to trade, and places trades based on the market’s reaction to the release. Because data releases are very difficult to predict, and the markets response to them even more so, fundamental trading can be very risky and volatile. Large gains can be made in very short periods of time, but without careful risk control large losses can also be accrued. For this reason beginner traders are often advised to stay away from the markets during data releases altogether.
While the two methods of trading are very different in terms of how Forex traders approach them, it is important to remember that the fundamental and technical sides of Forex trading are very much interconnected. Often a fundamental release will be the catalyst that is required to break a currency pair out of a technical trading range, for example. Conversely, a technical level of support or resistance will often turn out to be the point at which a sharp movement caused by an unexpected data release will reverse.
All said, the price of a particular currency pair is an aggregate of many differing opinions as to where that price might move in the future. Some of these opinions are technically derived, and some fundamentally so. For this reason, whether you want to trade Forex technically, or fundamentally, you should always be sure to consider both approaches in your analysis.