FOREX analysis is divided into two
types: Fundamental and Technical. Fundamental analysis attempts to predict
movements in currencies by examining current political and economic events.
Technical analysis uses historical economic data to predict movements in the
FOREX. These two sections will examine the principles of technical analysis and
the tools involved.
Basic Principles
Technical analysis is based on three
assumptions:
1. Price movements are a result of all
market forces combined. Things that can affect currency prices include political
events, economic conditions, supply and demand, seasonal variations and weather
conditions. The technical analyst, however, is not concerned with the reasons
for market movement, but rather, the movements themselves.
2. Currency prices follow trends. Many
market patterns have been recognized as having predictable consequences.
3. Price movements follow historical
trends. FOREX data has been collected for over 100 years and patterns have
emerged over time.
These patterns are based on human
psychology and the way people react to certain sets of circumstances.
Is Technical Analysis Necessary?
Most FOREX day traders rely heavily on
technical analysis and may use fundamental analysis to support their trading
strategy. A major advantage of technical over fundamental analysis is that it
can be applied to many different markets and currencies at the same time.
Fundamental analysis requires in-depth
knowledge of the political and economic conditions of a certain country;
therefore it is less likely that any one trader can do proper fundamental
analyses on more than a few countries.
The beginner trader may be put off by
the seeming complexity of technical analysis and wonder if it is necessary for
FOREX trading. As with any investment, FOREX trading requires a strategy.
Although any strategy is possible, technical analysis is a proven method for
predicting movements in the FOREX.
Does that mean it's a sure thing?
Nothing is 100% certain, and currency prices are affected by a variety of
forces. This is why many traders use a combination of technical and fundamental
analysis to plot their trading strategies.
Availability
Every FOREX online broker should
provide access to a wide variety of charts for technical analysis. Some charting
software is available free of charge while in-depth professional charts may
carry a monthly fee. Charts can be viewed by various time scales and provide
detailed information about price movements as well analytical overlays. Charts
can be zoomed in to the tick level or zoomed out to see the broad picture over a
period of months or years. Charts are updated in real time.
FOREX charts may be available on your
broker's web site or may be included as part of their trading software.
Before beginning in FOREX trading it
is a good idea to become accustomed to market behaviour by following charts for
a period of time and studying their movements and learning about trends.
Many brokers provide practice accounts
that can be used by beginners to place 'paper' bids – no real money is
exchanged. These practice accounts familiarize the beginning trader with FOREX
charts and market movement while at the same time allowing him to become
acquainted with the trading software a particular broker uses.
