In the Forex market, there are many different strategies that you could use to gauge when you place trades. Most Forex trading strategies use either a fundamental or technical analysis method to determine when to place trades. If you’re new to the market, you may not be sure what the differences or why you should choose one or the other there is this Best Trading Platform that can help you with that. Here are a few things to consider about fundamental and technical analysis in the Forex market.
Fundamental analysis is a type of market analysis that involves looking at the underlying factors of why security moves at price. In the stock market, this involves looking at the financial statements of a corporation and trying to determine whether it is poised to grow in the future or not. In Forex, you don’t have financial statements to look at, but there are many other underlying factors that can play a role in the value of a currency pair.
In the past, the value of currencies was directly tied to gold. When the financial system one off of the gold standard in the 1970s, the world’s currencies have simply floated in value to one another. How the values of these currencies are determined is a mystery to some. Essentially, the value of one currency to another depends on the strength of the economy of that country.
For example, when trying to look at the fundamental factors that can affect a currency price, you have to look at things like interest rates, retail sales, consumer confidence, political factors, new home starts, non-farm payroll, and even statements from the central bank. All of these factors combine to help determine the value of a currency relative to another currency.
When utilizing fundamental analysis, a trader looks solely at these underlying factors and does not necessarily look at any pricing information when determining the value of a currency pair. He doesn’t care about any potential patterns that might be occurring on a price chart. In fact, he probably does not even look at price charts of currency pairs at all. He just places trades based on the information that he has ascertained from the fundamental factors in the market.
Technical analysis is another method of analyzing the market that works in stark contrast to fundamental analysis. With technical analysis, the trader is interested in looking at price information on a currency pair. Technical analysts love price charts and look at them all the time. In many cases, technical analysts will have several charts open on a computer monitor at all times. Some of them even have multiple monitors with charts all over them. This way, they can see what the market is doing at any given time and check out all of the movement in the various currency pairs available.
The technical analyst believes that everything that you need to know about currency pair is already figured into the price. This is known as the efficient markets hypothesis. The technical analyst doesn’t really care about the retail sales of a country or the consumer confidence, as he believes that this is already reflected in the price of a security.
Because of this belief, technical analysts try to identify patterns in the price charts of security. There are all kinds of theories like Elliot Wave Theory that these traders point to in order to help identify price patterns.
With technical analysis, traders also use a number of different indicators. These indicators can be added to a price chart on all Forex trading platforms. These indicators provide additional information about the technical components of a currency pair. These indicators help traders identify when it is best to get into the market and when to get out.
Technical analysis also provides methods to help traders figure out where to set stop losses and take profit levels. By using support and resistance indicators, traders can more easily determine where the market is likely to go. The prices in the Forex market typically bounce off of support and resistance lines and go back to the other direction. This makes it possible for you to predict where to place your protection in trades. This way, a technical trader will not lose more than what he can really afford to lose on any one trade.
Which Method is Better?
If you are trying to decide between technical analysis and fundamental analysis, there are a lot of different factors that you have to take into consideration. One method is not necessarily better than the others. Some people prefer fundamental analysis while others like technical analysis better. In the Forex market, it seems as if more traders use technical analysis to determine when to get into the market and when to get out. Most of the commercial Forex trading systems and software out there utilize technical indicators to make their trades work. This is especially true in Forex software because the software can’t really gauge fundamental factors that well. It can look at technical information because it is based on algorithms and mathematical data.
In reality, using a trading method that pays attention to both fundamental and technical factors is probably the best. Even if you are a die-hard technical analysis fan, you still have to give a little bit of credence to some major fundamental factors.
For example, in the Forex market, most traders pay attention to the economic calendar announcements. On the economic calendar, you can see when important people in the Forex market are about to make a big announcement. For instance, and trades that include the United States dollar, you need to pay attention to any announcements that are made by Federal Reserve Chairman Ben Bernanke. When he says something important, it can make the market move very rapidly within a very short period of time. The same thing applies to all of the central bank heads around the world.
If you are a technical trader and you are just looking at the price data only, but you don’t pay attention to economic news announcements, you could be caught off-guard when something big happens.