When it comes to trading on Forex, one area that you will need to focus on is your analysis. To become a top trader you need to be able to identify the best times to trade that will yield you high profits. While this may sound difficult, analyzing the markets is not so difficult. To begin you simply need to understand the basics of analysis and how to apply this to your trading.
There are two main types of analysis that you can carry out on the Forex markets: Fundamental and Technical. These two types of trading analysis used to be widely divided. However in recent years there is much more crossover between the two styles. Indeed, making use of both styles will help to improve your trading accuracy.
This has been in existence for years and formed the bulk of analysis that was undertaken in trading rooms prior to the 1980’s. It looks at fundamental data and figures, using this to try to work out a value of an asset. In terms of Forex, all the available data is used to provide a valuation to a currency. This data includes anything that is the public domain including a countries GDP figures, inflation reports and of course interest rates. The differentials between these figures from one currency to the next will determine how in demand the currency is. This in turn will reflect the valuation that market gives it.
As fundamental analysis relives upon data, the times when this data is released tend to stoke heightened volatility in the market. In anticipation of the data release, traders will take new positions or liquidate existing ones. Then once the new figures are released, traders on both the buy and sell side of the news will be quick to adjust their positions. When fundamental news does not meet prior expectations, expect sudden market moves.
Technical analysis has only become a mainstream method of currency analysis in recent years. Previously it was thought of as a dark art, practiced by only a few. It has however since grown in popularity and is now popular with both institutional and retail traders. As a result it is now one of the most relied upon methods to predict where markets might move.
The central belief behind technical analysis is that markets patterns repeat due to human nature. Therefore when a similar pattern can be detected, the trade can position themselves for the expected scenario to play out. It relies heavily on the chart and historical data to interpret past market behavior.
The term ‘technical analysis’ can be thought of as an ‘umbrella’ term which encompasses many distinct styles of trading. What they have in common is their reliance on market patterns and repeatable human behaviour. However the tools that are used to identify this and the methods used can vary greatly between one technical trader and the next. As a result this form of analysis can often lead to conflicting opinions between traders. It is perhaps most important that a trader using technical readings to find opportunities sticks to one branch of schooling to avoid conflict and confusion.
Which Is Best?
Both fundamental and technical analysis have their proponents and detractors. It is important for a the new trader to recognize that neither offers a foolproof method of analysis. They are both tools that can help a trader to identify potential trading opportunities, but can both fail. No trading approach can ever yield a one hundred per cent accuracy. However if you mesh the best of both approaches when trading you will be able to reduce your trading risks.
Furthermore the decision to act upon the information will often come down to the individual trader and their interpretation of the data presented to them. However it is beneficial to remain open minded. Therefore Forex traders should investigate both approaches to find out what works for them.