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CO05 - What are the two types of market analysis in forex?

"Even before you get ready to trade, there are some things that you should be aware of about the markets. As a trader, it is your job to understand the price of the security. The price of a security moves not because of buying and selling but rather on certain factors. These factors can be determined based on applying two concepts of market analysis. These are known as fundamental analysis and technical analysis. As a forex trader, chances are that you will come across these two types of market analysis in your day to day trading. In this article, we explore these two concepts and give you a fair idea of what fundamental and technical analysis is all about. You should be able to differentiate these two types of market analysis and also learn about its importance when you are trading forex. Following this article, we will then get into more details about the two main types of market analysis in forex."

When it comes to the financial markets, there are different ways to study the security. There are two main schools of analysis of the financial markets, including forex. These are fundamental analysis and technical analysis.

Although the type of study of the markets might differ, the basic goal of both these types of study are one and the same. Whether you use fundamental analysis or technical analysis, you are basically determining the price of security being analyzed, with the intention to buy or sell short the security at a viable price.

However, the approach of both these types of analysis is vastly different, which often confuses many forex traders. The question that is often asked by traders is which of these two types of market analysis is better.

The truth is that there is no correct or a single analysis that will be correct. Traders need to use both technical and fundamental analysis in their trading. But this can change depending on the type of markets that you are trading.

For example, if you are a stock investor, you would primarily be looking at the fundamentals of the stock. This will give you an idea whether the price of the stock is trading at a discount or a premium. Based on this you would make the decision to buy the stock or not.

On the other hand, when it comes to trading the forex markets, fundamental analysis and technical analysis needs to be used. Of course, if you are a short term day trader, you will be using the technical analysis alone. Because the fundamentals don’t really play a big role in the long term.

Fundamental analysis, from the above can therefore be concluded as a type of market analysis that helps you determine the driving forces behind the movement in the price of the currency.

Using fundamental analysis, you are basically understanding the state of the economy and the potential implications it will have on the investors’ value on the currency and the interest rates.

Technical analysis, on the other hand deals with analyzing past price action to predict the future price. Technical analysis primarily relies on charts and technical indicators. Most of the trading systems in use today use technical analysis rather than fundamental analysis.

Again, depending on the time frame of your trading, which could be either a short term trading period or a long term trading period, you are able to switch between using fundamental or technical analysis.

However, successful traders rely on both technical and fundamental analysis. This gives a complete picture of the markets. When the fundamental and technical analysis are in alignment, you can see that the probability of your trades increases greatly.

Conversely, when the fundamental and technical analysis do not complement each other, you can expect that the market anomaly will eventually morph into a possible shake down of the markets. In other words, price can behave erratically. During this process, you can expect many traders to lose as the markets tend to reverse their direction.

This market anomaly happens every time in the markets and can be observed if you pay close attention to it.

Therefore, traders who do not make use of one of the two types of market analysis will often be subject to this market shakedown. This could potentially lead to losses at some point in time.

In order to be conservative and to manage your risk, traders need to focus on both fundamental and technical analysis. Many traders prefer to use technical analysis because they find it a lot more easier compared to fundamental analysis.

Fundamental analysis in forex deals with understanding and studying of the economy. Depending on how an economy fares, it will have implications on the decisions that will be taken by the central bank.

Interest rates are what drives the markets, and this is where the value of a currency can rise and fall. With technical analysis you are able to pick price levels where you can expect to see price to potentially reverse course and present you with potential profitable trading opportunities.

Therefore, unlike many beginners in forex trading, it is in your best interests that you begin to use both fundamental and technical analysis in your trading, if you are someone who is trading in the medium term such as swing trading.

While fundamental analysis and some aspects of technical analysis can seem a bit difficult to comprehend initially, they can be easily understood if you make an effort and give yourself time towards learning how to use these two types of market analysis in your trading.

Read 683 times Last modified on Thursday, 04 July 2019 10:23

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