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Much has been said about the technical approach to Forex trading. Charts are easy to deal with because they are right in front of the Forex trader in black and white. You can see the trend lines; you can see the support; you can spot the resistance. It is something solid and tangible; you can point at it and people will see the exact same thing you're seeing.
It has also been noted that possibly of equal importance is the fundamental approach. There is no need to use one approach exclusively and most experts will tell you that using only one approach is like batting one handed. You can do it – but why would you want to? The added difficulty to instituting fundamentals is once you have all this information, what do you do with it? It's not like the news is going to tell the Forex trader when to short the EUR/USD, or when to take profits, or even when to stay out of the Forex market completely. It all takes analysis. Obviously, reading charts also takes massive amounts of analysis, but charting always seems a little less ethereal than fundamental analysis.
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For instance, being the summer months right now, the market seems to be on a slow and steady pace in spite of any news that comes out. The Forex market doesn't seem to be reacting to anything in particular and the reason most experts will give is simply because it is the summer. The big money is on vacation. But the summer is almost at an end and the market movers are at the gate ready for a brand new season of excitement (television executives promise the same thing, by the way). So, once that happens, is there anything the Forex trader can do other than read the news (which by the time it's read, is already in the market), and react accordingly? And who is this “big money” everyone keeps talking about, and how is the lowly Forex trader supposed to know what they're doing?
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It turns out the so-called “big money” institutions are not invisible and they don't act under the radar at their various whims. The United States government doesn't allow it. The Commodities Futures Trading Commission (CFTC) requires them to file reports, and every average Joe Forex Trader has a certain amount of access to these reports. The CFTC publishes the Commitment of Traders report every Friday. This report comes in handy for the Forex trader because it tells you what the “big money” is doing and what their position is, which the government requires because of their large positions. So you can see in black and white what the people (and/or institutions) are doing and you can act accordingly.
In the report you will find changes in open interest, along with significant changes in net positions. If you can see that everyone has gone long on a currency, at some point soon they're going to have to sell. It only makes sense that a market reversal will be just around the corner. You don't necessarily have to jump the gun and get ahead of them, but there's nothing wrong with being one of the first on the bandwagon once you see it's happening.
This is where you'll find the market sentiment everyone talks about. It's not a privately held secret and the well equipped Forex trader makes himself privy to any kind of information that's out there. In black and white. Just like a chart.
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