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To evaluate trading opportunities
traders use fundamental and technical analysis.
Traders may choose to take a
conservative low risk, medium risk or high risk approach by using limit orders
and stop loss orders to manage risk in addition to employing fundamental and
technical analysis.
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Fundamental Analysis
Fundamental analysis
consists of macro, strategic assessments of where a currency should be
trading based on virtually any criteria but the price action itself.
These criteria often include the economic condition of the country that
the currency represents, monetary policy, and other fundamental
elements. |
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Fundamentalists track and
study economic figures, political news, market expectations, monetary
policy, Central Bank operations and market intervention and analyze it
to predict it's potential impact on the markets.
Fundamental analysis alone
is often insufficient to use when dealing with currencies, commodities
and other "margined" products. This is because fundamental analysis does
not provide for specific entry and exit points, and therefore makes it
difficult to control risk when using leverage. |
Technical Analysis
Technical analysis is probably the
most common and successful means of making trading decisions and analyzing forex
and commodity markets. It consists primarily of a variety of technical studies
that can be interpreted to generate buy and sell signals and predict price
patterns and market directions. It is a methodology that can be applied almost
in any market.
Chart reading is successfully
enhanced by the use of computer-based statistical analysis which creates
oscillating indicators showing over-bought/over-sold conditions, the pace and
direction of momentum and the relative performance of one item against another
or against the market. One part of this analysis is to analyze price charts to
identify short, medium and long-term trends, pinpointing future potential
trouble areas. Bar charts, point and figure charts, candle charts, swing charts,
volatility and momentum or relative analysis are all tools that are available
with a study of technical analysis and should lead to better investment profits
given consistent and intelligent application .
Differences between Fundamental and
Technical Analysis
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Technical analysis differs
from fundamental analysis in that technical analysis is applied only to
the price of the market, ignoring fundamental factors.As fundamental
data can often provide only a long term or delayed forecast of exchange
rate movements, technical analysis has become the primary tool with
which to successfully |
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trade shorter-term price
movements, and to set stop loss and profit targets. Fundamental analysis
is probably more effective in predicting trends for the long term
(longer than one year), while technical analysis is probably more
appropriate for shorter time horizons (0-90 days). |
Support and Resistance Levels
One use of technical analysis,
apart from technical studies, is in deriving "support" and "resistance" levels.
The concept here is that the market will tend to trade above its support levels
and trade below its resistance levels. If a support or resistance level is
broken, the market is then expected to follow through in that direction. These
levels are determined by the chart and assessing where the market has
encountered unbroken support or resistance in the past.
For example if EUR/USD has
established a resistance level at approximately 0.8705. In other words, EUR/USD
has risen up to 0.8705 repeatedly, but has been unable to move above that point.
The trading strategy would then be to sell EUR/USD the next time it gets close
to 0.8705 with a stop placed just above 0.8705, say at 0.8720. It would be
indeed a good trade if EUR/USD proceeds to fall sharply, without breaking the
0.8705 resistance. Hence a substantial upside can be achieved while only risking
10 or 15 pips (0.0010 or 0.0015 in EUR/USD). |
