Lesson #12 Analyzing Foreign Exchange Trading

Traders, especially the novice ones faced the dilemma of what trading analysis to apply when entering into a foreign exchange transaction.

Some says fundamental type is better that the technical analysis and vice versa. For seasoned traders, however, they know that both analysis should be taken into consideration for a successful and profitable transactions.

Fundamental and Technical Trading Analyses

There are two basic types of trading analysis: the Fundamental Analysis and the Technical Analysis.

Fundamental analysis is a method of studying the foreign exchange market making use of factors such as economic, social and political forces affecting supply and demand. These factors decide whether a trader will stay with the trade or sell.

This type of analysis simply states that if a country’s economy is doing better, the interest is getting higher, inflation is contained and the value of its currency is gaining strength. Translated, the better a country’s economy, the greater the faith other countries have in that currency.

Fundamental analysis can be utilized as back-up system in confirming if the market can support a trade recommended through technical analysis.

Technical analysis, on the other hand, focuses on the effects rather than causes of the market movement. It is system wherein analysts study the historical price movements of foreign exchange to determine if the prices will continue in the future.

Technical analysis also helps in identifying trends at an early stage which can help in finding more profitable trading opportunities.

Selecting Trading Techniques

No type of analysis is better than the other. In making transactions, both analysis should be taken into consideration because focusing on only one type of analysis can result into chaos. The following will illustrate the scenario:

You have your historical data and your charts. You find a good trading opportunity and you got excited because you think of huge profits. Then you enter into a trade without knowing that there’s a sudden change and trade move in the opposite direction. You are not aware that there was decline in interest rate of your currency and everybody excluding you is trading in the other side. Your sweet smile turned to sour because you ignored the fundamental analysis and lost a bunch of money.

The Foreign Exchange can be compared to a big ball oozing with energy, and within is the equilibrium between fundamental and technical factors that play a very important role part in determining the market direction.