How to Trade Forex Using Fundamentals with an Edge

Trading forex is a journey, and along the way, you’ll encounter plenty of ideas, strategies, and philosophies about how to “crack” the market. But the truth? A lot of people out there make it harder than it needs to be. Forex trading doesn’t have to be a complex web of guesswork. In fact, to succeed, you need a system that is simple, measurable, and repeatable. Something you can apply repeatedly without getting lost in the noise.

One thing I’ve learned through years of trading is that our brains are constantly trying to trick us. And this applies to forex trading just as much as it does to everyday life. Let me explain.

Our brains are wired to recognise patterns, even when none exist. It’s called pareidolia, a phenomenon where we see shapes or patterns—like seeing a face in the clouds or a figure in the shadows. The same thing happens when we look at a forex chart. Suddenly, those random lines and bars on the screen transform into “support levels” and “resistance zones.” This isn’t just a trading concept; it’s psychology. Studies show that our brains are naturally inclined to seek out order and familiarity in chaos because it’s energy efficient. After all, the brain’s primary goal is survival, not truth.

A fascinating study published in Nature Communications explains how the human brain is designed to interpret and impose patterns on random stimuli. This is the same mechanism that leads traders to believe they’ve identified a significant “level” on a chart. You can read more about this study here.

Another study from Frontiers in Psychology highlights how overconfidence in our ability to detect patterns can lead to poor decision-making. You can find this study here. Think about it: how often have you drawn a trendline on a chart, convinced it’s the “holy grail,” only to watch the market completely ignore it? You can find the study HERE.

Why It’s Not Just About Charts

Here’s the thing: you’re not just trading a currency. You’re trading the entire economy behind that currency. When you see the U.S. dollar soar after an inflation report, that’s not magic. It’s economics. The market moves because of real-world events, data releases, and investor sentiment.

Take a moment to ask yourself: why does a currency move the way it does? Why does the USD spike after inflation numbers are released? When you start digging into the “why,” you’re getting closer to what I like to call the real "holy grail" of trading—understanding the market’s underlying drivers.

The Chart Trick

Let me illustrate just how tricky our brains can be. Below is an image of a chart with random lines drawn on it.

EURUSD

Notice how your brain immediately starts to identify “support” and “resistance” levels? Now take a closer look: this chart is upside down! Funny, isn’t it? Your brain is working overtime, trying to impose structure on something that’s completely random.

This phenomenon occurs because our brains don’t like uncertainty. They crave patterns and explanations, even when there’s no real logic behind them. But here’s the key takeaway: those patterns can still be useful—not to predict where the market is headed, but to refine your entry points and trade with the market’s volatility and momentum.

What Really Matters

I’m not here to criticise anyone who uses trendlines, support, and resistance levels. These tools have their place. But they’re not the whole story. They won’t tell you why a chart is going up or down. What they can do is help you time your trades better and align with the market’s current mood.

So, the next time you’re staring at a forex chart, take a step back. Don’t let your brain fool you into thinking that every line you draw is the market’s blueprint. Instead, focus on the bigger picture—the economies, the data releases, and the human behaviours driving the price action.

By combining a deeper understanding of the market’s fundamentals with a clear, simple strategy, you can turn trading into something more than just guesswork. It becomes a process you can trust—one that you can repeat over and over again.

Exactly for this reason, I’ve developed a system that you can quantify. What I mean by that is a system you can use again and again with consistency. The simplest way to explain it is this: we use a set of relevant trading data for each economy (USA, Europe, Canada, etc.) to determine whether an economy is strong or weak. From there, we pair a strong economy with a weaker one, giving us a potential trading opportunity.

Before we go any further, you need to understand the basic structure of forex pricing. The price you see in forex represents a base and a quote currency. For example, in EUR/USD (the most traded currency pair in the world), the EUR is the base, and the USD is the quote. If the base currency is stronger and the quote currency is weaker, the market will rise. Conversely, if the quote currency is stronger than the base, the market will fall.

Interpreting Stronger or Weaker Economies

With that said, how can you really interpret a stronger or weaker economy? One of the easiest ways is to use a simple scoring system. Think of it like this: assign a score from -2 to +2, where:

• -2 means very bearish
• -1 means bearish
• 0 means neutral
• +1 means bullish
• +2 means very bullish

Got the concept? This simple scoring method allows you to quickly evaluate the strength or weakness of an economy, giving you a clear perspective without overcomplicating things.

What Really Moves the Forex Market

We already know that the underlying factors of an economy drive currency movements. These include inflation rates, PMI (Purchasing Managers' Index), central bank statements, rate decisions, and so on. Let me give you a closer look at some of these key data points:

CPI and Core CPI

The Consumer Price Index (CPI) measures the average change in prices over time for a basket of goods and services. It’s a direct indicator of inflation. Core CPI, on the other hand, excludes volatile items like food and energy, giving a clearer picture of underlying inflation trends.

How does this tie into the scoring system? If inflation is rising quickly, you might assign a +2 because it signals a bullish scenario where central banks could increase interest rates, strengthening the currency. If inflation is falling sharply, it could signal deflation or economic stagnation, earning a -2. A stable inflation rate, neither rising nor falling significantly, would be scored as 0 (neutral).

Example on USA CPI

PMI and Nominal PMI

The Purchasing Managers’ Index (PMI) reflects the economic health of the manufacturing and services sectors. A PMI above 50 indicates expansion, while below 50 suggests contraction.

Using the scoring system here, a PMI well above 50 might score +2, signalling strong economic growth and potential currency appreciation. Conversely, a PMI dropping below 50—especially when both manufacturing and services PMI fall together—could signal a looming recession and earn a -2. This is because a contraction in PMI often precedes a decline in Gross Domestic Product (GDP), the total value of goods and services produced by an economy.

Why is GDP important? GDP represents the overall economic performance and is directly linked to currency strength. A contracting GDP, often signalled by declining PMI, can lead to weaker currency performance.

Example on USA Manufacturing PMI Above 50 and falling and Below 50 and falling 

Central Bank Interpretations

The most important factor, however, is how central banks interpret economic data. Rate decisions and the accompanying statements are critical. Central banks, like the Federal Reserve or the European Central Bank, set the tone for the market with their outlook on growth, inflation, and monetary policy.

For instance, a hawkish statement, emphasising the need for rate hikes due to strong economic growth and inflation pressures, might earn a +2 because it signals bullish sentiment. On the other hand, a dovish statement, highlighting concerns about economic slowdown and signalling potential rate cuts, might score a -2, reflecting bearish sentiment.

Where can you find these insights? Central bank websites and official statements are your go-to sources. Pay attention to rate decisions and post-meeting press conferences. Often, it’s not the decision itself but the forward guidance that moves the market.

Now how can you apply this into your trading and start today!

As we discussed earlier, the goal here is not to make things overly complicated but to make them work efficiently and effectively. So, let’s break this process down step-by-step.

Step 1: Setting Up Your Excel Sheet

Open an Excel sheet and start by listing all the G10 currencies: USA, Canada, Australia, New Zealand, Eurozone, Japan, Switzerland, Sweden, Norway, and the United Kingdom. Structure it as shown below (you can add as many rows as needed):

Now, add data points—these are the economic indicators you'll monitor. These could include CPI (Consumer Price Index), PMIs (Purchasing Managers’ Index) for manufacturing and services, rate decisions, and others like GDP growth or retail sales. Be as detailed as you want!

Pro tip: Attach screenshots of the latest releases in a separate sheet or column for easy reference. This way, you can track how the data has changed over time, making your analysis more insightful. Personalise it to suit your trading style—this is your edge in the market!

Here’s an example of how it might look:

Step 2: Organising and Scoring Your Data

I highly recommend creating separate sections in your Excel file for different currencies or regions. This will make it easier to compare. Now, let’s discuss the scoring system.

How to Score Economic Indicators:

Each data point—like CPI, PMIs, and rate decisions—can be scored positively, negatively, or neutrally based on how the data impacts the currency:

• Positive score: Indicates stronger performance or outlook (e.g., CPI beating expectations, hawkish rate decision).
• Neutral score (0): No significant impact or as expected.
• Negative score: Signals weaker performance or outlook (e.g., PMI below expectations, dovish policy).

Summing It Up:

Once you’ve scored all the indicators for a specific currency, calculate the total score. For example:

• Europe (EUR):
  • CPI: -1
  • Rate Decision: +2
  • PMI Services: 0
    Final Score: +1
• USA (USD):
  • CPI: +2
  • PMI Manufacturing: +1
  • Rate Decision: +2
    Final Score: +6

Step 3: Interpreting the Scores

Now that you have the final scores, compare them to determine which currency is stronger:

• In this case, USD (+6) is much stronger than EUR (+1). This gives us a clear trading bias.

But remember the quote and base currency rule:

• If the USD is stronger and is the quote currency (as in EUR/USD), we should short EUR/USD, as USD strength means EUR will likely weaken relative to the dollar.

Step 4: Repeat and Refine

This method is bulletproof and repeatable. It allows you to analyse currencies systematically, providing a clear edge in your trading. You can scale this process, refine your scoring system, and even incorporate other metrics like political events or market sentiment if it fits your style.

By following this structure, you’ve built a foundation for data-driven trading that you can rely on time and time again. The beauty of this system lies in its simplicity and adaptability. Now it’s time to put it into action and make it your own!

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