Can’t find your way around FX trading? Well, you’re in the right place. Today we’re going to discuss a little about how to analyse the market. There are two ways of doing that:
- The Technical Analysis
- The Fundamental Analysis
In any other economic activity you when making an important decision regarding an investment, you need to base your decision on market research, and the forex market is no exception. Here’s how to do it.
The Technical Analysis looks at historical price movements and computed indicators (i.e.: relative strength index (RSI), market momentum) to predict future exchange rates. Apart from price movements or price action as it is called in the literature, other indicators are taken into account, such as volume and moving averages, which are often referred to as oscillators. Technical analysis is useful especially when you’re trading short term – when calling short-term price movements and when timing market entry and exit points.
Fundamental Analysis by comparison, reviews the economic and political factors triggering currency moves and market volatility. After all, the FOREX or currency market is the most volatile. This form of analysis relies on the interpretation of micro and macro-economic indicators for a specific currency’s nation (analysing the economic situation in the country where the currency is used) in order to determine the relative value of that currency against another currency. For this reason, fundamental analysis is recommended for making longer-term predictions on the exchange rate moves.
Both fundamental and technical analysis can provide multitudinous opportunities for traders to profit. Analysis is a tool, which used wisely can actually turn you into the next Bill Gates.
Delving more into technicalities, let’s briefly look at the pros and cons of each of them, and hopefully this will help you make your debut as a trader (that is, if you’re not an experienced trader already, able to joggle with the charts).
Technical Analysis Pros and Cons
Technical analysis is one of the most accurate tools to quickly assess a market and relying on that assessment, trade it profitably.
One potential benefit of technical trading is that millions of traders are looking at the same data at the same time. This often has a ‘herd effect’ when market trends follow a steady, observable pattern. The majority of the traders who see and follow the pattern with their trading can actually influence the pattern’s move and make it materialise.
However, we said pros and cons, right? The downside of this kind of trading is that technical traders (who think alike) tend to put their stops all at the same levels. This could make a decline more dramatic or stir a stronger upturn, and might give large stakeholders enough leeway to occasion such stops, which they can easily and accurately predict, relying on their own chart reading.
Fundamental Analysis Pros and Cons
Fundamental analysis takes into account economic and political triggers for one country comparative to another. Such factors include:
- Growth and employment rates;
- Investment yields and interest rates;
- Political stability;
- Current account balances and trade.
Fundamental forecasts for exchange rates are more suitable for longer-term trading and less for short-term time frames. However, some fundamental trading strategies and techniques have been developed and operate perfectly during the economically shifting period, which immediately follows major economic data releases.
Some traders tend to readily embrace technical trading and dismiss at least in part fundamental analysis because they believe:
- Most if not all its underlying information is priced into the market;
- It is complicated and time-consuming;
- It requires a solid background in economics and in-depth understanding of the economic phenomenon;
- Not to mention, it does not give objective trading signals.
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For TeleTrade education and training are essential to successful trading. With this in mind, the brokerage firm has developed educational packages to meet all learning needs from novice to expert level and certification. Having said that, you can either opt for office-based education – the company holds training sessions at their offices aiming to give you an in-depth understanding of the functionality and principles of the financial markets. If you opt for this package, you will learn about Forex, CFDs, general trading rules, technical and fundamental analysis, computed indicators and oscillators and a lot more. Most importantly, upon completion you will receive a professional trader certificate.
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