The methods used to analyze Forex and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a currency pair in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a economy or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market.
Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis looks at the price movement of a currency and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. Let's get into the details of how these two approaches differ, the criticisms against technical analysis and how technical and fundamental analysis can be used together to analyze Forex.
Fundamental Analysation
Fundamental analysis is the analysis that examines economic, political and social indicators to predict the economic health of a nation through various news information’s and tools like economic calendar which helps you stay updated on the happening of the global economies. Currencies can be viewed as the international representative of national economies; it follows, therefore, that economic health is an important component in currency valuation. The fundamental analyst constructs forecast models based on a myriad of different indicators to predict future currency movement.
This section outlines a number of theories and indicators as well as political dimensions and monetary considerations that are important in constructing Forex forecast models.
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Technical Analysis
While fundamental analysis helps illustrate the larger forces affecting the currency market, and long-term prospects for economic health, it has some critical failings. First, the almost limitless amount of factors that can be plugged into a forecast model might force a trader into a perpetual state of analysis, unable to pull the trigger on potential deals. More importantly, however, is fundamental analysis' uselessness in predicting entry and exit points. Technical analysis, on the other hand, ignores fundamental forces, focusing on short-term currency movements to identify trends and determine exactly when and what to buy and sell.
A trend is basically a prolonged price movement in a one direction. An upward trend can be identified by sketching a line beneath a series of lows; a downward trend by tracing a line above a series of highs. Over time, recurring price trends form support and resistance levels, or barriers at the top and bottom of the trading level. It is difficult for currencies to penetrate these levels because, over time, supply/demand has been built up in adequate abundance at both levels—demand at the floor, supply at the ceiling. These levels are obvious positions for buy/sell orders. Once these levels are definitively broken, however, they tend to form the opposite barrier.
Technical analysis allows traders to view entry and exit level prices apart from understanding better the overall trend of the market. It provides better insight in terms of actual price points to enter and exit trades and use various studies to suit clients trading style as well as requirements like day trading or long term trading, it gives clients flexibility to use time frames and studies on charts accordingly.
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