4.2 Fundamental Trading Strategies

Learn how to execute a Forex Carry Trade and find out about other popular strategies, such as Altman-Z score. You will also be introduced to the concept of blending fundamental and technical trading.

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Fundamental traders attempt to find the true, intrinsic value of whatever they are trading. Once they spot an opportunity, some fundamental traders simply open a position, while others use technical analysis to time the trade. For example, you might look at the traded volume of the stock or currency pair that you plan to trade. Other traders might have insight, or be creating a trend, so checking a two or three week moving average may let you join a spike. In some cases, good or bad news for the stock or currency is followed by an almost predictable reaction that can be traded. Many systems exist to weigh and compare potential trades. For example, the Altman Z-score for stocks is the sum of five ratios and is used to gauge a company’s credit risk.In fundamental _currency_ trading, you compare the fundamentals of the countries. One style of trading is based on simply comparing the interest rate of countries. In a carry trade, a trader buys the currency with the higher interest rate and sells the currency with the lower interest rate. The profit is the difference between the two interest rates, and sometimes also the appreciating value of the purchased currency. However if the exchange rate of the two countries changes this may negate some of the profit from the interest rate difference. It is also possible to blend fundamental and technical trading. For example, you might select a number of fundamental indicators to follow in the economic calendar in your trading platform. Research the market expectations of those numbers and watch how the market reacts to the announcement and to any revisions to the number. Then, change the time frame and see if the reaction of the market is predictable. For example 1 or 2 minutes after the announcement. This might help you time future trades. While you look into fundamental indicators, you might also look into the various kinds of risk in the Risk Management videos.