Lesson #11 The Various Types of Trading Analysis

Two Different Types of Trading Analysis

There are basically two types of Forex trading analysis you can use when you approach the market.

1. Fundamental analysis

2. Technical analysis.

These two schools of thoughts are constantly at war with each other. Debates are still raging about which of two is better. But you have to know a little bit of the two analytical methods.

Here is break down of each so that you can comprehend these methods fully.

Understanding the Fundamental Analysis

When you speak of fundamental analysis, you will be looking at the economic and political factors as well as players that affect demand and supply. Simply said, you just need to determine whose economy is booming and growing and which economy is a basket case or declining.

Basically, fundamental analysis rests on the premise that if an economy is growing the currency of that country will also become stronger. The reason behind this is that as the economy of a country gets stronger; its currency will be trusted by other countries.

To illustrate this fact, The U.S. Dollar has been on the rise and getting stronger. That’s because the U.S economy is getting stronger also. When the economy climbs up, interest rates will be propped up to push down inflation. The result will be a general strengthening of the Dollar. Basically, this is fundamental analysis.

Later in the course, you will learn how to spot news and events that have a direct impact on currency prices which could trigger movements. For now, it would suffice to know that Forex fundamental analysis is closely tied to the strength of economies.

Understanding the Technical Analysis

Studying price movements is the principal preoccupation of technical analysis. In simple terms: technical analysis = Forex charts.

The principle behind this is simple. You can see and study the historical movements of prices and based on these actions you will be able to determine where it will go next. You can easily spot trends and price patterns by simply looking at the charts. This will open opportunities for you to profit at the market.

Trend reading is the most important aspect of technical analysis you have to learn. Many traders have a mantra which says: “The Trend is Your Friend.”

You will be able to make tons of money when you identify trends and the direction where that trend is going. If you see trends, you will be able to trade in that direction. With technical analysis, you can spot these trends as they emerge. This means more profitable opportunities for you.

Don’t think that these concepts are very difficult to comprehend. They are easy to understand and you will be able to grasp them quickly. After your sessions at the School of Pipsology, you will become a smart trader.

Determining the better type of analysis to use

This is the biggest and the most commonly asked question. As you plunge into Forex trading, you will certainly encounter rabid advocates for both fundamental and technical trading methodologies.

You will find people that will tell you tat fundamental analysis alone can drive the market. Anything you see on the charts and its consequences would just be pure coincidence.

On the other hand, you may also encounter people that will tell you that traders only pay attention to technical analysis. They will further argue that because traders are following technical methods, future price actions and movements can be predicted accurately.

Do not ever fall into the trap of extremism. One is not better than another.

You have to learn how to effectively use both fundamental and technical analysis to become a very effective and competent trader. Focusing on just one type of analytical method can be disastrous. Here are several examples:

• You are looking at your charts and you spot a trend that signals a good trading opportunity. You start to get animated and imagine the windfall you can get from this. You instantly fell in love with your charts right there and then.

• You entered the market with a very wide smile on your face and proceeded to open trades.

• To your surprise, the trade is moving in the other direction and you instantly lost 30 pips. You never knew that there was a big interest rate cut for your traded currency and everyone in the market is trading opposite to you.

• Your widest smile turned to a scowl and you start to get angry at your charts. You throw and smash your computer on the floor and started to pulverize it. You lost big money on your trades and now your only computer is pulverized. All of that simply because you ignored fundamental analysis.

This short story has lots of melodrama in it but you should get the lesson here.

The Forex market is a very dynamic arena. It is like a ball of fire full of energy. Within that shimmering ball of fire is the proper balance of technical analysis and fundamental analysis. These two play important parts in determining the direction of the market.

You have to remember what your father and mother used to tell you when you are still a stubborn child: Too much of anything will always be bad for you. Back then, you probably thought that your folks are talking non-sense.

But in the Forex market, the same principle handed down to you by your parents also applies especially when deciding which type of analysis you have to use. You must never rely on a single method.

You must be able to learn how to balance the two methods of analysis and use both of them in your trading approaches. Only then can you really get the most profit from your trading and do well at the Forex market.