Technical analysis and fundamental analysis are the two basic areas of strategy in the Forex market which is the exact same as in the equity markets. However, technical analysis is by far the most common strategy that is used by individual Forex traders. Here is a brief overview of both forms of analysis and how they directly apply to Forex trading:
Fundamental Analysis
If you think it's hard enough to value one company, you should try valuing a whole country instead. Fundamental analysis in the Forex market is often an extremely difficult one, and it's usually used only as a means to predict long-term trends. However it is important to mention that some traders do trade short term strictly on news releases. There are a lot of different fundamental indicators of the currency values released at many different times. Here are a few of them to get you started:
- Non-farm Payrolls
- Purchasing Managers Index (PMI)
- Consumer Price Index (CPI)
- Retail Sales
- Durable Goods Orders
You need to know that these reports are not the only fundamental factors that you have to watch. There are also quite a variety of meetings where you can get some quotes and commentary that can affect markets just as much as any report. These meetings are often brought out to discuss any interest rates, inflation, and other issues that have the ability to affect currency values.
Even changes in how things are worded when addressing certain issues such as the Federal Reserve chairman's comments on interest rates; can cause a volatile market. Two important meetings that you have to watch out for are the Federal Open Market Committee and Humphrey Hawkins Testimony.
Just by reading the reports and examining the commentary, it can help Forex fundamental analysts to get a better understanding of any and all long-term market trends and also to allow short-term traders to be able to profit from extraordinary happenings. If you do decide to follow a fundamental strategy, you will want to be sure to keep an economic calendar handy at all times so you know when these reports are released. Your broker may also be able to provide you with real-time access to this kind of information.
Technical Analysis
Just like their counterparts in the equity markets, technical analysts of the FX trading market analyze price trends. The only real difference between technical analysis in Forex and technical analysis in equities is the time frame that is involved in that Forex markets are open 24 hours a day.
Because of this, some forms of technical analysis that factor in time have to be modified so that they can work with the 24 hour market. Some of the most common forms of technical analysis used in Forex are:
A lot of technical analysts have a tendency to combine technical studies to make more accurate predictions on your behalf. (The most common method for them is combining the Fibonacci studies with Elliott Waves.) Others prefer to create trading systems in an effort to repeatedly locate similar buying and selling conditions.
Choosing Your Strategy
Most successful traders will develop a strategy and perfect it over a specific period of time. Some people will focus on one particular study or calculation, while still some others use broad spectrum analysis as a means of determining their trades. Most experts would likely suggest that you try using a combination of both fundamental and technical analysis, with which you can make long-term projections and also determine entry and exit points. Of course, in the end, it is the individual trader who has to decide what works best for him.
When you are ready to get started in the Forex market, you should open a demo account and paper trade so that you can practice until you can make a consistent profit. Many people who fail have a tendency to jump into the Forex market and quickly lose a lot of money because of a lack of experience. It is important to take your time and learn to trade properly before you start committing capital.
You also need to be ale to trade without emotion. You can't keep track of all stop-loss points if you don't have the ability to execute them on time. You must always set your stop-loss and take-profit points to execute automatically, and don't change them unless you absolutely have to. Make your decisions and stick to them. Otherwise you will drive yourself and your brokers crazy.
You should also realize that you need to follow the trends. If you go against the trend, you are just messing with your money because the Forex market tends to trend more often than anything else and you will have a higher chance of success in trading with the trend.
The foreign exchange market is the largest market in the world, and every day people are becoming increasingly interested in it. But before you begin trading, make sure your broker meets certain criteria, and take the time to find a trading strategy that works for you.
by Giles Windholm
