Technical analysis uses forex market data, such as prices, volume, etc., together with technical indicators, such as relative strength index, moving averages, Fibonacci, etc., to decide the trading positions and forecast future price movements.
Technical analysis is based on:
1. examination of chart formations
2. differentiation of trends
3. identification of buying and selling prospects
4. analyzing highest and lowest price of a currency
5. understanding of opening/closing prices and volume of transactions
Depending on the trading style, forex trader can use technical analysis on a daily basis (5 minute, 15 minute, hourly), weekly or monthly basis.
Technical analysis uses the assumption that all market information and possible currency volatility can be obtained from the price chain. Forex trader who uses technical analysis believes in three fundamental assumptions – the market moves according to all factors, the price movement is purposeful and connected to these events, the history tends to repeat itself over and over again. In other words a trader looks back at what has already happened and makes decisions based on the believe that volatility will generally have the same pattern of the past.
Fundamental analysis uses financial news and economic news, such earnings and consumer reports, economic data releases, interest rates updates etc., together with non financial information, such as political news, weather broadcasts to determine the trades.
Fundamental analysis involves the analysis of current political and economical situation in the country of the selected currency. Generally, the country’s economy relies on the following factors:
1. Central Bank’s interest rates
2. National unemployment data
3. Tax policy
4. Inflation rate
5. Political unrest or transition
Forex trader who uses fundamental analysis studies the external factors which may affect the supply and demand of the market. Fundamental analysis in forex assumes that the market is unpredictable and the information can’t be immediately obtained; the currency prices are inconsistent and will change according to the future economic conditions.
So which analysis is more vital? Can a trader use only one in order to succeed or it is important to combine the two together?
The answer is simple – don’t limit yourself to one kind. Fundamental and technical analysis complete one another and both are vital for successful forex trading.