Fundamental and Technical Analysis

Fundamental analysis

Fundamental analysis is based on the demand and supply of the currency to be traded. This depends on the economic factors of the country using the currency, for example, economic strength, or otherwise, current interest rates, gross domestic product (GDP) etc.

The difficulty with using fundamental analysis to trade on the Forex money market is that the market is very fast moving, with rapid changes throughout the day. Economic data is more suited to long term investment. It involves constantly studying the data, knowing when a country is going to publish its economic reports and how to interpret them. This is why most short term traders use technical analysis based on price movements.

Technical Analysis

Technical analysis is based on the theory that prices move in a pattern and it is possible to predict when a currency has reached a high or low point based on historical evidence, then buy or sell accordingly.

There are a number of methods, based on charts, that technical analysts use to follow price trends, for example candlestick charts and Bollinger Charts. Traders may study several before taking a decision.

So which of the two methods of analysis should you use? Most traders probably use a combination of both. Fundamental analysis provides a long term view of the strength of a currency based on economic situation of the country using the currency plus current supply and demand, but it would be difficult to trade on a daily basis using this method. Nevertheless a trader needs to be aware of economic situations and when economic figures are published as these can affect trading. Technical analysis is useful for daily trading indicating possible entry and exit points. Therefore most traders will use both fundamental and technical analysis. To succeed on the Forex money market you need to have a thorough understanding of the currency you are trading in. Over 24 hours that currency may move dramatically up or down yet end the day at the same price as it started. Buying or selling at the wrong time can result in huge losses. Even experienced traders have bad days and the skill is to minimize the losses, hence the importance of having a stop/loss price in place. Understand how this works fully before attempting to trade.

Fundamental and Technical Analysis - Forex Trading Strategies © 2006

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