Importance of Technical and Fundamental Analysis in Forex Trading
Technical analysis and fundamental analysis are two different ways to analyze a market situation. Although most traders believe that one is better than the other and more reliable, those that trade forex will have to make use of both of them in order to determine the potential of a trade. This is because the forex market is unlike all others in many respects and both forms of analysis can be used to support each other The differences between these two methods is obvious, but being able to use both to plan a strategy takes practice and the more experience you have with them, the better your forex trades will most likely become.
Before being able to analyze a situation with either of these methods you must first understand what they are and what you need for them. The goal of both methods is to help you make a well-founded prediction as to how a currency will behave in the future, but the difference in how they come to a particular conclusion is what greatly differs. By combining or comparing the results of both analyses, you will have the best chances of succeeding as a forex trader.
Technical analysis is when a forex trader will collect data on the previous behavior of a currency and then use this to project how that currency will act in the future. This data is then turned into a chart that shows you graphically what the past trends were. This form of analysis is based solely on facts and what has already happened and is therefore not a projection of what might have been. There are three main principles of technical analysis and they must be kept in mind when using this technique to make a forex market prediction. The first principle is that history will always be repeated. This is not just a theory, but can actually be seen by creating charts based on data for a long period of time. It is easy to see that cycles do repeat themselves. The second principle is that all currency prices have trends. Studying present and past patterns enables you to determine in what part of a cycle the currency is in. Although this can deviate, there is some substance to this theory. Finally, it states that currency prices are affected by everything and are a reflection of that. This includes outer factors such as political movements and events, feelings of a society towards its economy like fear or greed and even the present supply and demand.
The charts that forex traders create from technical analysis are very handy to have and offer the advantage of allowing several comparisons at the same time. These can be used as a tool to, for example, follow and compare several markets or currencies on just one chart. This method also requires the inclusion of indicators, trends, gaps of high and lows or opening and closing values and wave theory. Common indicators could be oscillators like the OC or the RSI, which is short for the Relative Strength Index.
Fundamental analysis, on the other hand, is not based on actual data or facts. Instead it takes into consideration many factors of a country to project the future behavior of a currency. In order for a forex trader to benefit from fundamental analysis, it is imperative to very closely follow everything that goes on in a certain country. This includes factors such as politics, economics, statistics, environmental issues, seasons, weather, new laws and policies and even the supply and demand of a region. Taking all this you can then predict what will most likely be the outcome and the effects on the currency. Basically, this method requires following the reasons causing a market movement. Keeping up with the news of the countries of your currencies can be of great value since many major events are led up to and if you can come to expect something happening, you will be there when the forex market has its greatest fluctuations in price. It is a known fact that after a major event, especially one economical in nature, causes drastic forex movements and by avoiding the surprise of this happening you can either get out of a catastrophic trade or make a good trade and earn a lot of money with your forex trading system.
