Tools of the trade:Fundamental vs Technical Indicators

So, how do forex traders decide when to buy or sell?
There are basically two schools of traders, and you must decide which school fits your trading personality. The first school is the school of fundamental analysis. Fundamental traders use economic reports and news reports as the basis for their trading decisions. Forex traders who have a fundamental approach will closely examine world events, interest-rate decisions, and political news. Fundamental traders are concerned with properly interpreting news, whereas the focus for the technical forex trader is quite different.

The technical forex trader uses technical indicators (or “indicators”) to properly interpret price movement on a chart. The forex trader who adopts a technical, indicator-based approach will examine the price charts. So,
while the fundamental forex trader is concerned with interpreting news and world events, the technical trader is concerned with interpreting price on a chart.

What are technical indicators?
Indicators are simply another way of looking at a market price. In much the same way that it is possible to examine the speed of a car in many different ways, it is possible to examine price charts in many different ways, with indicators. Just for a moment, consider how many different ways you may measure the speed of a car:

• Measured in kilometers per hour.
  
• Measured in miles per hour.
  
• Measured in the time it takes to travel one mile.
  
• Measured by the time it takes to accelerate to 60 mph.
  
• Measured by how quickly the car can stop.
  

Likewise, there are many ways to look at price on a chart. There are more technical indicators than telephone call centers in India.
by Alex Nekritin and Walter Peters

It can be very confusing for the novice trader, and this is one reason why naked trading, trading without indicators, can be liberating. When starting out, many traders focus on the indicator. This is completely understandable since nearly 90 percent of the forex trading books, the vast majority of forex sites on the Internet, and forex trading seminars focus on indicators and indicator-based trading.

Indicators encourage “secondary thinking,” which is a real handicap for traders looking to acquire expertise. Secondary thinking involves analyzing the indicator, spending time considering where the indicator may go, rather than focusing on the market. Naked traders, by definition, focus on the market, which is very different. Focusing on indicators may be one of the primary reasons that some forex traders do not make money. Indicators can be confusing, unhelpful, and just plain wrong. In the next topics we take a look at technical trading, and some of the tragic trading mistakes forex traders make, and how to avoid them by adopting the naked-trading approach.