| | FOREX analysis is divided into two types:
Fundamental and Technical. Fundamental analysis attempts to predict movements
in currencies by examining current political and economic events. Technical
analysis uses historical economic data to predict movements in the FOREX. These
two articles will examine the principles of technical analysis and the tools
involved.
Basic Principles
Technical analysis is based on three assumptions:
1 – Price movements are a result of all market forces combined. Things that can
affect currency prices include political events, economic conditions, supply and
demand, seasonal variations and weather conditions. The technical analyst,
however, is not concerned with the reasons for market movement, but rather, the
movements themselves.
2 – Currency prices follow trends. Many market patterns have been recognized as
having predictable consequences.
3 – Price movements follow historical trends. FOREX data has been collected for
over 100 years and patterns have emerged over time. These patterns are based on
human psychology and the way people react to certain sets of circumstances.
Is Technical Analysis Necessary?
Most FOREX day traders rely heavily on technical analysis and may use
fundamental analysis to support their trading strategy. A major advantage of
technical over fundamental analysis is that it can be applied to many different
markets and currencies at the same time. Fundamental analysis requires in-depth
knowledge of the political and economic conditions of a certain country;
therefore it is less likely that any one trader can do proper fundamental
analyses on more than a few countries.
The beginner trader may be put off by the seeming complexity of technical
analysis and wonder if it is necessary for FOREX trading. As with any
investment, FOREX trading requires a strategy. Although any strategy is
possible, technical analysis is a proven method for predicting movements in the
FOREX. Does that mean it's a sure thing? Nothing is 100% certain, and currency
prices are affected by a variety of forces. This is why many traders use a
combination of technical and fundamental analysis to plot their trading
strategies.
Availability
Every FOREX online broker should provide access to a wide variety of charts for
technical analysis. Some charting software is available free of charge while
in-depth professional charts may carry a monthly fee. Charts can be viewed by
various time scales and provide detailed information about price movements as
well analytical overlays. Charts can be zoomed in to the tick level or zoomed
out to see the broad picture over a period of months or years. Charts are
updated in real time.
FOREX charts may be available on your broker's web site or may be included as
part of their trading software.
Before beginning in FOREX trading it is a good idea to become accustomed to
market behaviour by following charts for a period of time and studying their
movements and learning about trends. Many brokers provide practice accounts
that can be used by beginners to place 'paper' bids – no real money is
exchanged. These practice accounts familiarize the beginning trader with FOREX
charts and market movement while at the same time allowing him to become
acquainted with the trading software a particular broker uses.
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