Today we will be looking into the two main types of forex analysis:
- Fundamental Analysis
- Technical Analysis
We understand that none of them are necessarily better than the other and they are both equally effective when used properly.
What is Technical Analysis?
In TECHNICAL ANALYSIS, traders spot trends in the market to identify when to buy or when to sell. This usually takes the form of support or resistance levels. The low points of support are called floors.
Similarly the high points of resistance can also be referred to as ceilings.
Technical analysis is based on the popular chaos theory, which is a branch of mathematics focusing on the behavior of dynamical systems. Some systems (like price movements or the weather) might appear random at first look, but the chaos theory says that these kinds of systems or patterns may not be and can be used to forecast future ones.
Technical analysis can therefore help you predict future movements based on past price action. Price action is in essence the movement of prices over time.
After all markets only move in three directions:
- UP
- DOWN
- SIDEWAYS
Technical analysis is a valuable tool that can help you identify where to enter and where to exit the market.
What is Fundamental Analysis?
As an investor you come to an investment decision using various methodologies. Fundamental Analysis explores the opportunities arising in the global markets by analysing
- Economic forces
- Social forces
- Political forces
These forces affect the supply and demand of an asset and therefore the price or in our case the exchange rates.
In simpler words, in fundamental analysis we observe the key factors identified earlier to determine which economies will grow stronger and which ones weaker.
To be able to make an informed decision though, you will need to understand the impact certain events and figures like:
- UNEMPLOYMENT RATES
- GROSS DOMESTIC PRODUCT (GDP)
- INFLATION
affect the country's economy which in turn impacts the level of demand for its currency.
Generally, fundamental analysis helps us identify whether the country’s current and future economic outlook is good. If yes the currency should strengthen. The better the economy then the more foreign business and investors will be investing in the country.
It's always a good idea though, to combine fundamental and technical analysis for enhanced market insight.
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Note: This article only sets out two basic types of forex analysis. There are other forms of analysis and techniques available that can be used by the readers. This article does not intend to encourage an increase in the reliance on these techniques and neither encourages to reduce the reliance on other techniques.
