To interpret the situation on the market correctly and figure out what some actions and events will cause, you need to learn to "read" information, received from external sources. To predict future currency fluctuations, you have to master two types of analyses: technical Forex analysis and fundamental Forex analysis.
Let us find out what are the features of each one of them.
Fundamental Forex Analysis
The fundamental Forex analysis is based on the analysis of economic and political news and their influence on currency rates. It includes methods aimed to predict the behaviour of the prices on the Forex market. The basis of these actions is the consideration of the fundamental data of the countries. It is quite difficult to fulfil fundamental analysis on forex, because the same factors may have different influences on the situation. The success of the fundamental analysis depends on the clear understanding of the impact of its components on the currency market.
- the interest rates of central banks;
- the economic policy of the state;
- the political situation;
- the characteristics of economic growth;
- the indicators of the trade balance;
- the inflation rates;
- state solvency;
- investor's sentiment;
- the competitiveness of the product;
- consumer sentiment;
- state of the real estate market;
- state of the labour market;
- other indicators.
Fundamental data is published in the form of indexes which are regularly reviewed. When estimating data, the comparison of previous and current indexes happens and the dynamic and economic processes for several years are analysed. It is vital to have analytical skills to associate information and the possible consequences that it will cause. Analytical skills may be developed through constant training.
The feature of the fundamental Forex analysis is its orientation on long-term deals (year, half a year, quarter). That is why some traders refuse to conduct this analysis although it is a powerful tool for the prediction of future situations which should not be ignored.
Conducting fundamental and technical analyses must be the mandatory part of every trader's work.
Technical Forex Analysis
The technical Forex Analysis is the method of the currency rate prediction, based on the analysis of charts, using technical indicators. It helps determine the future direction of the price movement based on historical data. The advantage of this analysis is the opportunity to use it in short-term, and middle-term forecasts, from operations, carried out within one day to transactions, that last for several weeks.
- Market considers everything. Factors that influence the market has already been reflected in the price and determined the behaviour of market participants.
- Price moves in a specific direction. Any price change has one of three directions – trends. The trend may go up (rising or "bullish"), down (or "bearish") or it can be "flat". The task of the trader is to identify the trend in its infancy and follow it while trading until it changes.
- The market has a good memory (history repeats). The pattern of the previous situations is reflected in the present. Laws that influence the market remain unchanged.
Charles Dow (1851-1902) is called the "father" of the technical analysis. In the late 19th century he published a series of articles in which he outlined his observations of the stock market. His views formed the basis of the technical analysis.
The technical analysis includes methods that let one figure out the most beneficial moment to enter the market. All the methods are based on the evaluation of the trade volume and price patterns. Instruments, which help in making decisions, are graphical ways to display the information (candlesticks, bar charts, line charts and other less popular ones) and other technical indicators, based on historical price data.
All the signals provided by indicators are advisory. The use of indicators, together with other instruments that lets one conduct market analysis, will make your work more effective.
The most effective option is to combine fundamental and technical analyses. It is quite difficult, but this will help you to get a stable income from trading on the currency market. The fundamental analysis is based on the search of the reason unlike the technical analysis observes what is going on with the currency rate. Тhus, both analyses are intended to complement each other.
Conducting fundamental and technical analyses must be the mandatory part of every trader's work. That is the only way that a trader would be able to identify the sequence of actions and make the right decision.
It is quite difficult to analyse the situation on the foreign exchange market. To make the work of a trader more comfortable, we have such information as Economic Calendar and Interest Rates to conduct the fundamental analysis.
The MetaTrader 4 trading platform has a wide choice of instruments to conduct the technical analysis.