Just as is tradition in most financial markets trading, so is
in forex trading the adoption of technical analysis and fundamental analysis as
trading tools. Both tools, if properly used could bring about a long-term
trading career.
Technical analysis is the trading analysis based on the
fundamentals of price movement. The historical price movements are studied to
determine the current trading condition and potential price movements. Here,
the analysis of the price of a currency pair with respect to time is made and
the change in the value of a currency pair over a certain interval be found out
to determine the entry and exit time and point.
The rationale behind the use of technical analysis is that,
theoretically, all current market information is reflected in price, and as a
result, what is really needed to make a trade decision is price action.
Technical analysts travel back through history to look out
for similar patterns formed sometime in the past and form trade ideas based on
this with the belief the price will act that very way it did in the past. Repetition
of history makes these analysts look into past data to spot trends to be used
as trading guide and for the opening of trading opportunities.
In technical analysis, the use of chart is employed because
charts are the easiest thing to spot historical data. These charts exhibit some
elements of subjectivity though, for it is not always seen from the same angle
by its users.
Fundamental analysis is based on the act of analyzing the
market through economic, social and political positions of a nation or
different nations to determine the values of their currencies and economic
health. It uses the forces of demand and supply to determine the prices of an
asset. The use of demand and supply as an indicator of where price could be
going is not really hard a job, what is actually is the ability to analyze the
factors or determinants of demand and supply.
The rationale behind the use of fundamental analysis as a
trading concept is if a country’s current or future economic outlook is healthy,
then its currency should strengthen; and the healthy a country’s economy is,
the higher the number of foreign investors and businesses it will attract, for
there will be the need to buy the country’s currency to purchase those assets.
Certainly, the value of the currency of a nation which gets a
growth rate of 20% yearly would be better than that of a country whose growth
rate is slow. The value of the currency of a developed nation will be far
better off and have higher stability than that of a developing or
underdeveloped nation.
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