As we know, the forex market is a multi-billion, decentralized pool of thousands of traders and many more thousand trades occurring every working day. The opportunities for forex traders to make vast profits are numerous, with those skilled enough to predict what will occur in the short and medium term beating the market and trading for a living. This group can broadly be divided in to technical and fundamental traders, the former looking for trading set-ups based on reliable trading patterns whilst the latter tend to look at events away from the price charts, interpreting the longer-term and underlying trends which push currency prices higher or lower. Whilst neither technique can be considered better than the other in terms of producing successful trades, many fundamental traders will argue that the correct analysis of the real drivers of the forex markets are more reliable for generating consistent profits.
Fundamental v technical forex trading
Fundamental traders have, at least over the life of online forex trading, has gained a reputation for being the most boring way to trade. Keeping a close eye on political and economic events in far-flung countries has been well and truly beaten by the dazzling charting software, technical tools and chart-based indicators available to forex traders from their living rooms. However, there is a certain truth behind the old adage that forex trading should be boring to be successful. Fundamental traders will argue that whilst their counterparts are trading 1minute charts with a complex system of 15 brightly-coloured indicators, the fundamentalist in their all their boring glory will be anxiously updating their news feed for the latest war report, GDP figures or interest rates before they push the buy or sell button. However, it is this same group who feature some of the most successful traders of a generation and whose insights have been guided by their ability to interpret shifts in currency trends.
The easiest technique available
The skill in interpreting fundamental economic data and news releases that these traders demonstrate comes from a basic ability to see rise and fall of supply and demand in the future. They look for specific events which drive the demand for a certain currency over a period of several weeks or months. Weaknesses in demand can also be taken advantage of and simply looking at any weekly or monthly price chart will identify the areas that these traders pile in long or short to take what will hopefully be a long a profitable ride higher or lower. This is not always, however, a ‘jam tomorrow’ method and those looking to make a fortune overnight will most likely already be bored of at the very sound of these basic economic references. However, for those looking for a medium term strategy and who are prepared to ride out the small ups and downs of the daily forex markets, this can be a highly profitable and straightforward way to trade.
Interest rates are a great way to make long-term profits
Interest rates are one of the key fundamental drivers of forex market medium-term trends. They create a very basic demand for currency for those with extremely large amounts to invest, swinging the market in one direction or another. The fact that most interest rate movements will be just a single percentage point may not have much meaning to you or I with our high street saving accounts, but for those large financial institutions and central banks who see that as a multi-million dollar investment, the reason why these small movements in interest rates are so important becomes obvious. Fundamental speculators consistently monitor the possibilities of interest rate rises, especially in those currency zones where the economy is beginning to pick up. For forex traders, everything inflationary from an increase in jobs, house prices or bread can be taken as a sign that rates may rise in the coming months.
Trading forex based on interest rates alone is one of the easiest methods available. Many traders will enter before a rate announcement, hoping to catch the first wave, but also risking getting burnt if it does not happen. Shrewd forex traders will, however, wait for confirmation of the rate rise and look for the market to move beyond nearby areas of support or resistance before entering. It is worth remembering at this point that those big investors driving the markets are looking to gain from the interest that the currency offers and are likely to take long term positions. Therefore, a currency with a steadily rising or high interest rate will always steadily rise beyond the initial rate hike.