Fundamental Trading Systems

Trading Systems:

A trading system (also called a trading strategy) is a plan by which a trade is placed. It defines the different parameters for entering a trade, holding the position, and exiting the trade. These parameters are defined with the goal of achieving the maximum profit and minimizing losses on every trade.

Fundamental Trading Systems :

A fundamental trading system relies on the release of economic reports and the data found in those reports as parameters for entering a trade. This type of system is much more dependent on demand factors than technical trading systems. The parameters are the economic reports and their ability to affect the demand for a currency.

A fundamental trading system can have the parameters such as the release of the nonfarm payrolls with the expectation that the payrolls figure will be high, which would create more demand for the USD. Another parameter could be the release of the FOMC minutes in which the Fed makes a decision on interest rates. Any economic report can affect the demand for a currency and fundamental trading systems predict how and when this will happen.

Fundamental trading systems do not usually combine more than one report at one time, but will use only report and its analysts� expectations to determine if demand will be increased or decreased. Charts are not considered or used by fundamental trading systems.

Advantages and Disadvantages :

The advantages of using a fundamental trading system are very similar to the advantages of using fundamental analysis. Fundamental trading systems can be quite useful because they look at the real moving force behind a currency price movement, namely the demand for a currency. Their predictive power is quite accurate, particularly when they adopt an Intermarket approach.

The main disadvantage of using a fundamental trading system is that the economic reports can surprise everyone, including the experts. When that happens, the parameters will not be met or will fail, leading to losses. Another disadvantage is that the price change is often factored into the currency price by the time the economic data is released. So, even if the report is consistent with the analysts� expectations, the price might not move or any price movement will not be strong or reliable.

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