Technical And Fundamental Analysis In The Forex Markets
This is one method for analyzing the prices of the two. The other method is the fundamental analysis. These two approaches differ hugely in their approaches and scopes. Technical analysis basically deals with the previous price and volume changes and uses a set of statistical calculations to project the possible price trends.
Currencies tend to trend more and fluctuate less violently unlike stocks which behave pretty much the different way. The reason for this is not hard to understand. Currencies trend depending on the countries. foreign and economic policies which are macro economic in nature and the currency pairs take fairly long enough time to react to any change in policies. Where as stock movements are more or less determined by microeconomic factors and market sentiments.
Why Technical Analysis Is Critical For Forex Trading?
It is true that technical factors reflect changes to the fundamental parameters of a currency but but still technical approach to analyzing the movements of a forex currency grossly takes into consideration only the historic price and volume movements.
The following are the reasons for this intrinsic behavioral difference.
1. A trader may want to go short or long within the span of a day and cover up positions there by cashing in on the intraday fluctuations which are hardly affected by the economic and policy changes which are fundamental in nature.
2. Technical analysis stresses on the historical statistical data for projections which takes into consideration the short and medium term perspective which is a welcome factor for a trader who does not want to hold huge forex currency assets for longer periods.
3. Intra day fluctuations can be fairly well predicted and entry exit points, regardless of short or long positions, can be easily identified with technical analysis which is not the scope of fundamental analysis.
One question that arises in ones mind at this point is, if technical analysis steers out of fundamentals, then why is it so popular with so many traders? There are two strong arguments about its popularity.
1. Historical data are market’s future indicators as they give insights into the short term behaviors of markets.
2. Although the market trends are clearly the reflection fundamental changes a currency is undergoing, they sure are the results of collective intelligence and reactions of the whole market to affecting incidences including rumors.
What Approach Must A Trader Take With Respect To Technical Analysis?
Unlike the fundamental analysis which places heavy weightage onto the intrinsic values of currencies, technical analysis doesn’t do so. It is based on the price changes and volumes only and not why the prices have changed when they did. In short, it depends basically on the patterns of price behavior supported by some sophisticated mathematical paramenters.
Fundamental analysis refers to political and economic conditions that may affect currency prices. FOREX traders using fundamental analysis rely on news reports to gather information about unemployment rates, economic policies, inflation, and growth rates.
Fundamental analysis is often used to get an overview of currency movements and to provide a broad picture of economic conditions affecting a specific currency. Most traders rely on technical analysis for plotting entry and exit points into the market and supplement their findings with fundamental analysis.
Currency prices on the FOREX are affected by the forces of supply and demand, which in turn are affected by economic conditions. The two most important economic factors affecting supply and demand are interest rates and the strength of the economy. The strength of the economy is affected by the Gross Domestic Product (GDP), foreign investment and trade balance.
Various indicators are released by government and academic sources. They are reliable measures of economic health and are followed by all sectors of the investment market. Indicators are usually released on a monthly basis but some are released weekly.
Most of this information comes straight from the Forex Fundamental Analysis pros. Careful reading to the end virtually guarantees that you’ll know what they know.
Two of the most important fundamental indicators are interest rates and international trade. Other indicators include the Consumer Price Index (CPI), Durable Goods Orders, Producer Price Index (PPI), Purchasing Manager’s Index (PMI), and retail sales.
Interest Rates – can have either a strengthening or weakening effect on a particular currency. On the one hand, high interest rates attract foreign investment which will strengthen the local currency. On the other hand, stock market investors often react to interest rate increases by selling off their holdings in the belief that higher borrowing costs will adversely affect many companies. Stock investors may sell off their holdings causing a downturn in the stock market and the national economy.
Determining which of these two effects will predominate depends on many complex factors, but there is usually a consensus amongst economic observers of how particular interest rate changes will affect the economy and the price of a currency.
International Trade – Trade balance which shows a deficit (more imports than exports) is usually an unfavourable indicator. Deficit trade balances means that money is flowing out of the country to purchase foreign-made goods and this may have a devaluing effect on the currency. Usually, however, market expectations dictate whether a deficit trade balance is unfavourable or not. If a county habitually operates with a deficit trade balance this has already been factored into the price of its currency. Trade deficits will only affect currency prices when they are more than market expectations.
Other indicators include the CPI – a measurement of the cost of living, and the PPI – a measurement of the cost of producing goods. The GDP measures the value of all goods and services within a country, while the M2 Money Supply measures the total amount of all currency.
There are 28 major indicators used in the United States. Indicators have strong effects on financial markets so FOREX traders should be aware of them when preparing strategies. Up-to-date information is available on many websites and many FOREX brokers supply this information as part of their trading service.
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