There are basically 2 primary methods that Forex traders use to analyze the market. They are technical and fundamental analysis. Pure technical analysts will say that it is impossible to trade on the news, because the market moves so fast and what news there is of the charts will tell you also. On the other hand, the fundamentalist will say that only the news move the market. Technical indicators are always the followers. By what methods should we use? To find out, let’s take a look at the pros and cons of both of these methods.
Technical analysis involves tracking past currency price movements and use indicators to help identify the direction in which the current price may be heading. This analysis can be performed manually or automatically. Under the automated system, traders use software (expert advisor) or robot to help find trades and identify entry and exit points. Technical traders believe that all of the information needed to place a trade is contained in the graphics.
The Fundamental Analysis
The Fundamental analysis focuses on key underlying economic, financial and political factors to determine the price direction of a currency. Fundamental traders believe that the currency movements, whether it becomes stronger or weaker, are related to the strength of the economy, the political and financial situation. Therefore, fundamental reports and news that are important to them. News and reports such as interest rates, employment, trade balance and the GDP are of great importance. Other data such as retail sales, durable goods, home sales and the ISM will also have an impact on the movement of the prices.
-It helps provide specific entry and exit point for the operators during the negotiation.
-Graphics can offer all people an easy way of identifying trends immediately. This is possible because the same data is also being seen by millions of merchants, as a result, if a large number of Forex traders do the same, this could create a self-fulfilling prophecy of reinforcing trends.
-It focuses on charts and indicators. It is without a doubt the easiest and more accurate than the method used by many traders so far.
-Graphics and tools can also, sometimes help to point out when the trend is about to start or end. Therefore help the operators to a level of two of their profits and stop losses more accurately.
-If many traders place their stops around the same areas, this could cause a reverse in price movement, as it can potentially allows bigger players in the market of two intentionally trigger these stops.
-The tools used are basically lagging indicators. It can be dangerous to totally rely on the assumption that the current price and the trend is to predict future prices. They often do, but not necessarily.
-Relying completely on charts means that you can’t pick up other signals that can change the trend.
The Fundamental Analysis
-Fundamental analysis increases our knowledge and understanding of the global market. So help us to get a clear picture of the overall health of the global economy.
-We can use fundamental analysis to explain some of the unexpected movements of the prices. Therefore, to know what prices move higher or lower.
-Main news of the release at any time can ignite large price movement when there is a great difference between the expectations and actual results. If you can predict and capture this movement on the price, it can be very cost-effective.
-Foundation for the analysis is best used for the long-term forecast of the rate of change of the movement.
-There is so much information that one can easily be confused.
-It is very difficult to use all this information to pin the entry point or exit point for the trade.
-At some time in the short-term release may provide a false signal and mislead the trader opening a trade. This signal is converted to often a knee-jerk reaction in the market.
-Sometimes the information or news published in may already have been priced in the market. Therefore, the information does not have a significant impact to the movement of the prices.
-It requires a person with at least some basic knowledge of the economic situation.
-Press releases can sometimes produce dramatic and quick movement of the price of a currency pair in both directions up and down as the foreign Exchange market to try to digest the news. The inexperience of the operators are caught in a chain of losses.
In my opinion, there is no ideal or best method of analyzing the Forex that will guarantee you a 100% results all the time. Technical analysis of charts and assist short-term traders to take their decisions, while long-term traders will need to keep abreast of the latest news and economic data concerning the country of the currencies that you are trading in. Keep in mind that these methods of analysis are only tools. If used correctly, can usually help you trade more effectively. This is the reason why the majority of Forex traders often use both approaches of analysis to make trading decisions.