eToro – Forex Trading Forum

[Tropezienne]

Two techniques are used for forex analysis – how to determine what and when to trade on the forex. Each trader has his or her preference based on their personal experience and knowledge. However, most traders use a combination of both techniques.

If they don't – they should !

Technical Analysis
This technique is based on the study of historical prices which are examined and subject to various calculations. These calculations result in technical indicators – of which there are many – and which are used on graphs. These graphs are available for each currency pair.

Technical Analysis thus facilitates the study of trends. These graphs are presented in different forms such as bar charts or candlestick charts. They show very basic information – such as the hourly, daily, weekly, monthly lows and highs. With the application of advanced charting tools the experienced trader can read much more information from them.

[Tropezienne]

Fundamental Analysis
Fundamental Analysis is not based on prices but on economic reality. This technique looks at the external factors that will affect currencies – the economic, financial and political situation of a country. By examining these factors the forex trader will come to a decision about the intrinsic value of a particular currency and use this decision to make a judgement about it's future performance. If a significant trend is anticipated as a result of these deliberations – and often in combination with Technical Analysis indicators – a trading decision will be made.

Conclusion
Technical Analysis uses history to determine the future. It is based on the psychology of the forex market and benefits from combining with the information that can be found in Fundamental Analysis. If Technical Analysis is related to emotions of investors, Fundamental Analysis uses their reasoning.

[Tropezienne]

Technical Analysis or Fundamental Analysis – which is the best ?

Neither technique is better than the other. Individual traders may depend on one more than the other but must ultimately use both. In combination both techniques can be used to refine your analysis.
Fundamental Analysis will help you use important medium to long term factors and Technical Analysis will help you to determine when there is a trend and the best time to trade.

Don't be misled by people who tell you that you can depend solely upon one of these techniques.

Although I personally favour technical analysis I always check a forex calendar before any trade. My graphs may be showing me a nice trend full of momentum – but a quick check of the calendar may show that a fundamental announcement has just been made or is imminent. This factor could significantly affect my trading decision.

[Tropezienne]

Technical Analysis – The Basics

There are three principals involved in Technical Analysis :

1.that current market price is a reflection of all know information
2.the use of charts to predict future outcome
3.the use of charts to interpret trends

1. Current Market Price reflects all known information

The foundation of Technical Analysis in forex is the acceptance that current market price is a reflection of the balance between supply and demand.

The trader studies charts of price movement to predict future forex trends and to make trading decisions – to buy, to sell or not to trade. The skill of identifying trend patterns takes time to foster. But as the goal of a forex technical analyst is to identify past patterns to predict a future outcome – it is an important skill for technical forex analysis.

There is inherent risk – a pattern that repeats is not necessarily an accurate tool and cannot guarantee a price movement. Charting skills are vital.

[Tropezienne]

2. Charts – the Technical Analyst's toolbox

There is a wide variety of chart types. Etoro uses Bar Charts and Candlestick charts. In combination with technical indicators these charts shows the activities of all traders in the market. It is the psychological reactions of traders to market fluctuations that create the charts. As human psychology remains pretty much the same patterns that can be seen to have worked on historical charts are used as forecasting tools for future trades.

3. Charts and the Concept of Trend

It is a well known and often quoted fact ('the trend is your friend') that all prices on the forex move in a trend. Logically, the current trend continues until it reverses. The use of charts to observe the price actions of a currency pair in the forex market is the main activity of a forex trader using technical analysis. By identifying a trend early a trading decision can be made.

Reading the charts is not mathematical or scientific – but it does take practice to 'get' it right. Once you have 'got' it this is what you do :

identify the early stages of a trend
decide whether it will have enough momentum to trade
close a trade before the inevitable reversal.

[Tropezienne]

Fundamental Analysis - Basics

Fundamental analysis is used to determine the future value of a currency. The fundamental analyst identifies the intrinsic worth of a country's economy by studying the economical, political and environmental factors and statistics that will affect supply and demand. Forex traders are most likely to gather information from news sources to determine unemployment forecasts, political ideologies, economic policies, inflation, and growth rates.

Political and Financial releases
When applying forex fundamental analysis traders follow the facts and figures outlined in the speeches of politicians, economists and the representatives of major financial institutions.
To start with - arm yourself with a good overview of the world markets and, given the current climate at the beginning of 2009, an understanding of the financial crisis.

Economic and financial factors have the biggest impact on the price movements of currencies. Economic and financial data releases are therefore closely watched by the forex market because of the uncertainty of their effect on the market. This uncertainly is heightened because these fundamental releases are kept strictly secret up to a pre-arranged time.

next : the essential forex calendar

[Tropezienne]

It is vitally important for forex traders to consult news releases and financial calendars before trading. Unless you are an experienced trader do not trade around the time of a financial announcement because the associated rise in volatility can be deceptive and hard to handle.

eToro has a great Forex calendar. The colour of the flames indicates how 'hot' the news is - an indication of the impact of the announcement on the forex market.

[Tropezienne]

Supply and Demand

In addition to keeping up with these important announcements forex fundamental analysis requires a basic understanding of the law of supply and demand :

If there is a decrease in supply but the level of demand remains the same, there will be an increase in market prices.

If there is an increase in supply, it produces the opposite effect.

Thus, fundamental analysts study the supply and demand for the country's currency, products or services, quality management, government policies, past performance, future plans and economic indicators like Gross Domestic Product (GDP), industrial production, interest rates, international trade, CPI, durable goods orders, PPI, PMI and retail orders.

With this data and an awareness of the current financial calendar the fundamental analyst constructs a model to compare the current and estimated value of one currency against another. The analyst will then decide whether the currency will rise or fall according to its current intrinsic value and by comparing it to the current exchange rate.

So, forex fundamental analysis focuses on what ought to happen in a market. It works best if an analyst knows a particular market very well.

Fundamental analysis should be used in tandem with forex technical analysis to determine a Forex trading strategy.

[Tropezienne]

As I have discussed earlier in this thread these two analytical techniques are based on opposite assumptions and can be used – should be used - in combination to make trading decisions.

Technical Analysis is a method of predicting potential price movements and future trends of the market based on the study of charts of past market action taking into account the price of a currency pair and the volume of trading.

Fundamental Analysis is a method of forecasting price movements of a currency pair based on economic factors, political, environmental and other relevant factors and statistics that will affect the supply and demand of that currency pair.

Technical Analysis is generally favoured by new and inexperienced traders. In practice, experienced traders use both Technical Analysis and Fundamental Analysis to determine their trading strategy. A major advantage of Technical Analysis is that experienced analysts can use this technique to follow many markets and currency pairs, whereas the Fundamental Analyst needs to follow a single, particular market very closely to be effective. Some may follow the fundamentals of two or three currency pairs, but this requires a lot of experience, research and interpretation.

continues .....

[Tropezienne]

Technical Analysis uses historical market behaviour to predict future trends and is therefore based on the psychology of the markets. On the other hand, Fundamental Analysis requires reasoned interpretation of currently available factors and statistics.

Basically, the difference between the two analytical techniques can be summed up as:

Technical Analysis is related to emotion.
Fundamental Analysis is related to reason.

Or :

The Technician studies the effect of market movement.
The Fundamentalist studies the cause of market movement.

Newbies on the forex often ask which of these two analytical techniques is best. As it happens there has not been any serious or prolonged study made in order to determine whether there are differences of performance between Technical Analysis and Fundamental Analysis.

What is clear is that both techniques can be used, should be used, to refine your analysis as a regular part of your preparation to trade. Basically, Fundamental Analysis will help you to select the trades with high potential in the medium to long term and Technical Analysis can help you to decide the best time to enter a trade.