There are numerous ways to go about analyzing currencies. To recap, fundamental analysis relies mostly on government-released macro data such as unemployment, GDP and consumer confidence, to name a few. Technical analysis tends to rely on analyzing charts and complimenting indicators. However, these forms of analysis alone do not always give traders a high probability of success. For example, if you a fundamental-based trader, you may be faced with risks on the chart that you may not have noticed. Similarly, technical traders who do not know the fundamentals can get burned as well.
That is why you will need both fundamental and technical analysis to provide you with high probability situations that can yield nice returns. Obviously, a prerequisite to this style of trading requires you to have at least a basic understanding of both forms of analysis. I can not stress enough the importance of education if you are going to be a successful trader of forex or any form of investment for that matter. I can not tell you how many times I have heard a beginning trader feel overconfident only to lose their entire account balance. Whenever I ask them how they prepared themselves, the answer is always the same, lack of education.
Once you have a firm understanding and have done a nice job of getting yourself prepared, open a paper trading account. A paper trading account is usually offered through most brokerages and it allows you to test your strategy without putting your hard earned money on the line. Remember, whenever you start out on a new style of trading there will be a learning curve. That is why paper trading accounts are another key to success because you may tweak your strategy and avoid financial disaster. I am not trying to scare anyone into not investing. Simply, I am trying to point out the reality. If you educate yourself and practice trades on a paper account until you are comfortable enough to use your own money, you will have a solid foundation and many years of success ahead of you.
Enough of the warnings, lets get into the meat of this strategy of using both forms of analysis. When I start trying to find possible trade set ups, I look at the technicals first. I look for pairs have a nice technical set up using support, resistance and indicators such as moving averages, MACD, etc. Once I have found a currency pair that I like technically, I move to the fundamentals. If the fundamentals do not match up with the technicals, toss out the trade. Both forms of analysis must match in order for me to feel comfortable to place the trade.
Here is an example: say you are trading the GBP/USD that has an ideal technical set up (hypothetical situation) in favor of the US Dollar. Well from a fundamental standpoint, the UK is in a small recession. Being that the US is not, this gives the US a fundamental advantage over the UK. However, this alone does not satisfy the fundamental side of the trade, I need evidence! Look at recent government reports from both countries. If the UK is clearly struggling and data reports are coming in under economists’ predictions while US reports are coming in at or above expectations, we have ourselves a trading opportunity.
The bottom line here is there are ways that you can give yourself an advantage when you trade. Combining fundamental and technical analysis is just one example. While the example I gave is not always that simple in real life, that is the way you should approach the forex pair you are thinking of trading, if you wanted to trade using both analysis. Now it is your turn to prepare yourself using education and paper accounts. Once you have that down, start to integrate your strategy with the paper account and soon you will find your groove. From there, the sky is the limit.