Essentially, Forex trading is art, in this case, the art of analysis. How? In a sense, even if a group of traders learn from the same trader, that doesn’t necessarily mean the result, is the same for each of his followers. The result won’t even be the same even with the teacher him or herself.
Capabilities and expertise (skills) of analysis, is one of the main factors of success or failure of a trader in the world of Forex trading. Forex analysis will either be consistent for repeated profits, or something much lackluster, and dangerous.
Understanding both aspects, is extremely helpful for manual traders, or for those that are more interested in trading with the best Forex signals. Regardless, traders should know the basics of their MT4 or MT5 platform, as well as these two foundations of Forex.
Let’s start today with learning the basics of analysis in Forex trading. Broadly speaking there are two basic types of approaches / analysis.
Which is best? Don’t waste time searching for articles trying to figure this out. Although the above was written in number 1 spot, fundamental analysis, this does not make it better than technical. So let’s review each one by one, and then put back it together for the benefit of the new Forex trader.
Fundamental analysis is a way of seeing the market through economic, social power, and politics that affect supply and demand. In other words, you look at the state of economic conditions. The idea behind fundamental analysis is that if the economy of a country is performing well, then their currencies will likely follow.
For example, the value of the U.S. dollar continues to rise because the U.S. economy strengthened / improved. The consequences could be even higher interest rates to control inflation; the effect is the value of the dollar will continue to strengthen.
Above is one example illustrates how the fundamentals can affect currency values. For now we take the base line, that fundamental analysis is a way to analyze the market through economic conditions of countries concerned.
Technical analysis is the study of price movements in terms of mathematical analysis. From here we can imagine there will be charts or calculations / mathematical formulas in it. With historical data and price movements analysis can provide a projection on where the price will go up, down, or turn around. Or it could be called a ‘trend’ which is highly sought after in the realm of technical analysis. By identifying trends or patterns correctly, you can find the best trading opportunities. This type of trading is encouraged in the Forex signal market, and used by many analysts.
People say that in the technical analysis the trend is your friend. If you are able to properly recognize the trend, then you will find it easy to profit.
Linking Technical and Fundamental Analysis
To become a Forex Master, you need to know how to effectively use both types of analysis. Let’s look at a few points that show how focusing on just one type of analysis could turn into a disaster.
So, you look at your charts (technical) and you find an opportunity that looks opportune. With a fiery passion you dream that money will fall like rain from the sky. You think, wow I’ve never seen an opportunity this sweet (I love my chart).
Then with full confidence you immediately proceed to enter trades with your brokerage. With a big smile, you eagerly await your reply as though profits have been in plain sight the entire time.
After a few moments, and the order has been opened, prices move into the opposite direction and you see a loss of 40 pips. What happened? Well, the interest rate just declined on the currency pair you were holding a strong position in, and the currency weakened. You put too much emphasis in technical analysis, and fell flat on your face.
If you used both types of analysis like a true Forex trader, or signal provider, then you would have ended up in a more aware, and stronger position.
Forex is like a big ball of energy moving and flowing, this ball is a balance between fundamental and technical factors that play a role in determining where the market will move. No side of the ball will ever control the entire weight of the market, so traders need to understand the balancing act and adjust their own trading style.
This can be frustrating, but knowing the difference between these two elements is severely important.