Forex Trading Analysis
Forex Trading Analysis is not merely a part of trading; it is the essence of Forex trading. You can’t get continue your winning run for very long if you don’t get yourself attached with the basic facts of Forex trading analysis. In this article, we will discuss the types of Forex trading and their impact.
Types of Forex Trading Analysis
There are generally 2 types of Forex Trading analysis:
- A) Fundamental analysis, considers factors and events, opinions and policies that might impact the future value of a currency.
- B) Technical Analysis, involves the study of historic and current currency values and trading volume.
No matter what approach you take, the objective of both analyses is to attempt to project currency price direction and identify trading opportunities.
Well, among the traders, there is a great debate about which type of analysis is better for a trader. Is it better to be a fundamental trader or a technical trader? Over the next couple of minutes, we will explore what the difference is between these two types of traders and which pieces of information they tend to look at.
In Fundamental analysis, the analyst try to assess the economic well-being of an entity, not taking into account its price movements. In case of trading in the stock market, a trader would take a look at the company’s earnings, expenses, assets, and liabilities. They will use those data points to determine the health of the company. If the economic well-being of the company is trending better, then fundamental traders may buy the firm’s stock in anticipation of demand growing for that firm’s stock.
In forex trading, this process is done based on the country. A fundamental Forex trader has to analyze the country’s inflation, trade balance, gross domestic product, growth in jobs and even their central bank’s benchmark interest rate. By assessing the relative trend of these data points, a trader is analyzing the relative health of the country’s economy and whether to trade the future movement of their currency.
Technical analysis doesn’t have anything to do with the economic situation; here the trader has to recognize a pattern on a price chart. For stock traders, they will analyze the price of volume of the shares traded on the market. If prices are moving higher on increasing volume, traders will buy stock of the company. Based on the pattern, a trader will determine the entry and exit points for the stock. A technical trader is not as concerned about why something is moving because the trends and patterns on the charts are their signals.
In Forex trading, a trader has to use many of the same technical tools that are used in stock trading. A technical Forex trader will assess the price action, trend, support and resistance levels. Additionally, the indicators and oscillators added to a price chart are very similar between the stock and foreign exchange markets. Moving averages, Bollinger Bands, MACD, Relative Strength Index (RSI), and stochastic tends to be some of the more common tools in a technical traders tool box. This is a result of the indicators ease of use and clarity of signal it provides.
Forex Trading technical analysis can be done quickly by assessing the direction and strength of trends. After speaking to thousands of people in our webinars, seminars and twitter, my observation is that trend technical analysis is integrated into most facets of trading. Traders will use the trend analysis to help them determine which pair to trade and the direction to trade it.
You can see in the example chart: how a technical trader would notice this 6,000 pip trend where the AUD is very strong relative to a very weak EUR (which is why the rate is moving down).
A trader would trade in the direction of this trend by selling the EUR/AUD pair.
Technical VS Fundamental: What Forex trading analysis is better?
One of the most common questions that every new trader ask: ‘which is better: Technical or fundamental analysis?’
As we have discussed that Technical analysis can be performed on any chart, fundamental analysis, or the study of the actual components of the economy that represents a currency, can be quite a bit more subjective.
The table below will get you familiar through some of the differences of these two Types of analysis:
As we all know that you must learn the functions of a platform before starting analyzing the market. So, if you are relatively new in Forex Trading arena, we would like to recommend you to read these articles:
|Chapter 4||Forex Trading Analysis|
|Lesson 1||Forex Trading Analysis|
|Lesson 2||Forex trading charts|