Technical and Fundamental Analysis in the Forex Market

by madhav joshi digital markting expert

Fundamental analysis

Fundamental trading for currency traders targeted factors that should influence currency value, involving the comprehensive report of affected economies, interest rates, government monetary and central bank, gross national products, and fiscal policies, etc.

Technical Analysis

Forex markets are analyzed via the use of charts that display market prices over a time period. In the past financial charts were drawn by humans, But now charts are provided by the forex trading platform. And They are also available online on websites. Brokers also offer charts to their clients.

Charts are used for studying historical patterns of price movements, finding current trends, and through these charts, they also predict future price movements. Here we explain two charts that are used for technical analysis.

Both technical and fundamental analysis can be used to trade currencies.

Technical analysis (TA) involves the study of historical currency prices in an attempt to determine what is going to happen next. By doing this, a forex trader is not trying to predict what the currency will do in the future (no one can predict what prices will do). The trader simply studies prices to increase his probability of making money (reacting to price changes).

Depending on a trader's time frame (frequency of trading), TA is applied on a forex chart accordingly. For instance, a forex day trader may use a chart with a 15-minute period to generate his entry and exit points whereas a swing trader (holding positions for more than one day) may use a 4-hour or daily chart. To make a buy or sell decision, the FX trader can use a combination of technical indicators, trend conditions, price filters, etc.

Traders should not rely blindly on technical analysis. This is a common mistake that traders make because they forget the reason why TA works in the first place. Technical analysis works because it is widely followed by many people. It is like a self-fulfilling prophecy. When traders become overly dependent on TA to trade currencies, they become obsessed in their quest for the magical combination of indicators that work the best. The huge effort and time they spend searching for the "best" system make it almost impossible for them to obtain the necessary trading experience that comes from mastering a particular strategy or system. As the saying goes, they become "jacks of all trades, but masters of none."

While technical analysis tries to determine what the price WILL do, fundamental analysis tries to figure out what the price SHOULD do. Fundamental analysis in the forex market usually involves the study of economic reports, world statistics, relative interest rates, international foreign policy and world events, the state of the political systems of different countries, etc. The fundamentalist will try to forecast the future price movements of a given currency pair based on his analysis of these factors.

One big drawback in relying solely on what the price "should" logically do is that overconfidence in the analysis could result in the justification of losses. As discussed in the section, "Forex Trading with a Strategy," losses must be limited in any form of trading. If a fundamental trader concludes that a currency should appreciate in value relative to another currency, then he might be tempted to let his losses accumulate - especially if the price drops fast while he waits (or "hopes") for the fundamental factors to affect the market as he expected. This is why it is so important even for fundamental forex traders to learn how to use TA.

Many forex traders combine technical and fundamental analysis in their trading. There are also a large group that only use TA to trade. Even though there are traders that like to use fundamental analysis exclusively, we do not recommend that our clients do the same. That is why, in our free FX training, we teach all our customers how to use technical analysis to trade currencies. Customers who qualify for our mini forex trading e-book also learn a very powerful trading strategy based on technical analysis.

Conclusion:

Currency trading can take place on the basis of two approaches as Fundamental and technical analysis. Collect complete details about both approaches from this article. Here we also explain the factors of both approaches in a deal for enhancing your knowledge.