Bases of fundamental and technical analysis Forex
FOREX trading allows both fast profits and substantial losses. Currency rates change based on certain regularities, and a trader will profit if he or she takes into account various factors and their influence on rates. There are two main methods used for forecasting market trends - fundamental analysis and technical analysis.
Fundamental analysis reveals the reasons behind the dynamics of exchange rates. Currency prices are determined by supply and demand that are influenced by the economic conditions of a country, so macroeconomic reports, economic indicators, financial news, and social and political events affecting nations and the international community become the focus of this analysis.
Fundamental analysis allows us to evaluate the current economic situation and forecast the influence of events on the behavior of the currency market. The information that is important to fundamentalists includes central bank interest rates, government economic rates, political changes, emergencies (floods and hurricanes), unemployment, social problems, the state of the country's leading enterprises, as well as expectations and rumours, and other events that influence the value of the national currency.
Fundamental analysis is quite complicated, it is necessary to know the history of currencies which reflect complex relationships between countries in order to forecast the results of economic or political measures, therefore a fundamental analyst often needs an economics background.
Forex Technical Analysis
Contrary to fundamental analysis Forex, technical analysis does not reveal the underlying causes of fluctuations in currency values but rather analyses the market price itself. Technical analysis studies only one object, the chart, which is a visual representation of short-term price movements (from one-minute to weekly time frames) that precede future trades.
On such time frames the fundamental analysis is irrelevant, as the statistical data of a country's macroeconomic indicators is much rarer - once a week, once a month, etc.
Technical analysis supposes that the fundamental data that influence the exchange rate is already taken into consideration, so there is no need to analyse each of the indicators separately. Technical analysis assumes that future trends will be similar to how currencies moved in the past, as market participants will behave in a similar way under similar conditions.
Technical analysts also point out that rate movements are subject to trends. So if you can find similarities with the past situation on the current chart, it is possible to give a correct prediction about how the current decline or fall in the value of the currency will end up.
Fundamental analysis and technical analysis have in common the objective of predicting the direction of currency values, but they differ in their approach.
It is possible to trade forex successfully using only technical analysis, but the two are related. Advocates of technical analysis will always react to the news which causes the rates to fluctuate.
At the same time, even a one-week holiday of a fundamental analyst leads to the fact that he is not aware of the market situation, because during his absence there were new, unrecorded events. In this case, the fundamentalist can use charts, because they visually represent the market condition at the moment.
Fundamentalists usually look at the charts just before entering the market, in order to find signals of price increases or decreases.