When starting out in Forex currency trading, there are two basic approaches to analyze the Forex market. These two approaches are Fundamental analysis and Technical analysis. The main elements of these Forex trading styles are explored below.
Technical analysis is the most likely choice for a beginner Forex trader. It focuses on the study of price movement through charts. These charts are used to identify trends and patterns. With this information, they then predict what is most likely to happen in the future, using past events. The theory behind technical analysis is that all market fluctuations is reflected in the currency, thus by examining price action, all trading decisions can be made. Being able to identify trend in the early stages in the key to technical analysis
For example, a basic chart shows the past relationship between any two currencies the investor has chosen. It shows the peaks and troughs in the relationship, and after experience a chart should help the investor predict future currency movements.
Some of the indicators used when applying technical analysis are resistance, support, moving averages, Bollinger bands, trend lines and pivot points. When using price based indicators there are few recommended by traders. They are the relative strength index (RSI), commodity channel index and stochastic oscillator.
If a beginner, this is probably the least likely style to use. Fundamental analysis consists of examining economic, social and political data. They also look at macroeconomic indicators such as inflation rates, economic growth rates and interest rates. The key idea being fundamental analysis is that if a country is doing well, this should also mean their currency is doing well. Most beginners choose not to take on fundamental analysis immediately is because it is a long gruelling process with vast amounts of research to be done. As well as that, an overload on information is possible.
Part of fundamental analysis is examining anything that can affect the currency of a country. For example, news coverage, GDP (Gross Domestic Product) changes, political events, inflation predictions, current events, government reports, retail price data, current events and changes in interest rates.
The impact of economic conditions in a country can affect the value of their currency. For example, government budget deficits or surpluses. The market can react negatively to government deficits whereas the market reacts positively to government surpluses. Another economic condition that can affect a country's currency is trade. For example, if the trade flow for a country suddenly reduces, it can have negative effect on the currency of that country. Analyzing and trading currencies based on fundamental analysis is only good for a long term currency investor.
Market psychology and trader perceptions can influence the market in a variety of ways. This article has explained the differences in the two forex trading styles available, choosing which is best for the trader, is up to their wants and needs.
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Article Added on Thursday, July 31, 2008
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