Types of Analysis
There are two types of analysis that are most common in forex trading.
- Fundamental Analysis
- Technical Analysis
Trading is not done on gut feeling or chance. Traders usually observe patterns to know if a move will prove useful or not. The main purpose of any analysis is to figure out when enter or exit a position and also to see which position you should take.
Fundamental Analysis is the analysis of big influencers that affect currency rates. These include the global political environment, economy etc. For a fundamental analysis traders will look at central banks to check interest rates (as they have a major effect on currency rates), the political environment, and even weather. The last one might seem a little out of place but it is actually important because extraordinary weather conditions can affect prices as supply and demand change.
Economic releases also play an important, albeit tricky, role in fundamental analysis. This is because sometimes even the best analysts make big mistakes about what an economic release will bring and so what happens is that all those who believe in that analyst will start trading according to those believed changes and so market action starts moving in one direction. Eventually, however, when the release finally comes and the previous prediction proves to be false, the market will shift direction completely. Therefore, right before and after these releases markets can look quite a bit chaotic.
In Technical Analysis you look at support and resistance level (which have already been explained before) and observe patterns. Knowledge of the impulse and the corrective wave and the Golden mean and 50% all come in handy here.
Technical Analysis basis its working on the Chaos Theory which states that even the things that seem to be the most chaotic usually are following some kind of a recurring pattern if you know where to look. The place to look in Forex is…well everywhere, but mainly support levels, resistance levels, past trends, current trends etc.
In forex there are no get rich quick schemes. It is like any other business. You have to be consistent, take informed decisions, and learn the trade.
These forms of analysis will help you make these decisions but remember that no one can always profit. Some losses are inevitable. It is still possible to maintain a decent sustainable earning for a long time with the proper use of these analyses and patience.
To analyze, it is imperative that you know how to read charts. Lucky for you that’s what we’re covering next.