Technical or Fundamental Analysis Once you start trading forex sooner or later you will ask yourself a question what analysis to use- fundamental or technical? It is important to understand that the movement of currency prices directly and indirectly is being affected by various economic and political factors. We should never underestimate the importance of both technical and fundamental analysis.
A common myth is that you need a special economic education in order to understand fundamental and technical analysis. In fact, everyone who is willing to invest some time and effort is able to learn how to read those analyses and produce profitable results.
Fundamental analysis refers to the way political and economic events affect the country’s currency. For this purpose, most forex brokers offer economic calendar where traders can follow all the news and see how important impact there will be on a particular currency.
Generally, it turns out that in order to learn how fundamental analysis work you will need to observe the market before, during and after the release of the news. Note that we are not saying that you should be trading during news releases as this is very risky and requires experience and certain skills. What we can suggest is to take some time to observe the market and trade before and after the news. It is important to mention that every single news release is associated with a forecast about expected outcomes on the market. In cases when important economic news is approaching it is crucial that you secure your positions by putting Stop Loss and Take Profit. Sometimes the market reacts much stronger than what forecasts predict and therefore it is of great essence we realize the risks associated with news trading.
Technical analysis is the study of the patterns of the price movement and it is based on several principles:
1. The movement of prices is the result of a combination of various market forces – political events, economic conditions, seasonal inflation, supply and demand. Traders who use technical analysis, do not worry about why the price moves, they are interested in price movement itself.
2. The price in the Forex market is moving in a trend. Investigation have concluded that the price is moving in repetitive patterns.
3. Price trends of the past can be used to predict the movements of the present. The data collected in the Forex market for many years now shows that some price patterns were evident.
The psychology of people and the way they react in certain situations and circumstances are the basis of these patterns. Although most traders believe that technical analysis is very important, they still use fundamental analysis in order to prove that their strategy is right. In contrast to the fundamental, technical analysis can be applied to different currency pairs in the financial market.
Fundamental analysis requires detailed knowledge of the economic and political conditions of a certain country and this is why we may say that for traders at times it may be difficult to use fundamental analysis. For novice traders the aspects of technical analysis may seem at first complex but if the right amount of time is being invested for studying and understanding its applications it could be extremely beneficial. In any case, if you want to be a successful trader you will need to have a strategy.
It is necessary to spend some time learning about technical and fundamental analysis, before you start trading actively. You can begin practicing on a demo account and it will allow you to get acquainted with trading without losing any money while you learn. The currencies movement is being affected by a very large number of factors and therefore the most successful traders perfectly combine both technical and fundamental analysis.
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