If you are a new forex trader, forex technical analysis may sound like rocket science. You may even mistake it for fundamental analysis. Although both will require critical thinking, they are obviously at the opposite end of the other in terms of subjective-objective spectrum. Understanding how Forex works and how both types of analysis can be done will help you achieve greater success in foreign currency trading.
What is Forex?
As with any investment, you need to know what kind of commodity or security you are dealing with. In this case, you are dealing with a foreign currency that you can buy or sell to make a profit based on their variable values. The truth is that foreign exchange trading can be very risky. This is because they can dramatically change their values in a short period of time. But if you're smart enough to analyze trends, you can make a big profit out of it.
Fundamental currency analysis
As the risk is high when dealing with currency, it is important to have some forecasting technique. In this case, various forms of analysis can help you predict how the currency will move. Fundamental analysis, for example, uses politics, economics, and sudden events, after which these factors combine to make up the overall situation. The trader looks at the general situation and makes an estimate of how that situation will affect the currency. For example, when a nation loses its leader, that nation's currency may suddenly decline in value.
Currency technical analysis
Technical Forex analysis does not deal with situations, but with raw, non-emotional data. Instead of reading the news, the trader looks at the recent history of foreign currency values. The merchant can even watch for months & # 39; currency value if he or she wants to see the bigger picture. He or she will then draw data diagrams to facilitate reading of progress or trend. By using indicators such as moving averages and Bollinger Bands, the trader will distinguish a pattern or trend. He or she may also recognize when the currency is experiencing a deadlock. A deadlock or a traffic jam means that the currency is locked in a small range of values. This may mean that the currency is low risk or it may not be profitable by trading at that value.
The benefits of Forex technical analysis
For some pros, forex technical analysis may be self-sufficient when making forecasts and following trends. With Forex technical analysis you don't need to become an economist or political analyst, you just have to be a Forex trader who can compile and read charts. Through the graphs you can now find out what is likely to happen tomorrow or next week. However, you must be aware that even forex technical analysis can be wrong. But at the very least, it can provide you with a better base when dealing with high-risk security, such as a currency that is better than bothering with your next trading move.