To improve your trading effectiveness it is very important to understand why the market moves and what factors impact these movements. Fundamental analysis consists of studying the different elements which affect the future price of an asset as well as how and why these elements affect the price. while analysing fundamentally, traders need look at a variety of factors such as economic data, government policies and geo-political factors and will need to analyse how these factors impact the asset prices.
The fundamentals that are the core to Fundamental Analysis include a broad range of data and events. Often, a major event can impact the market drastically causing major price changes. This can be anything from a terrorist attack, an interest rate change by a central bank, a natural disaster, an announcement by a company and much more. The range of factors that are considered fundamental creates a dynamic and ever-changing market force which is why Forex trading is so exciting.
To understand how certain fundamentals impact the market, let us review some of the most powerful factors. The first factor is interest rates. That is, as a country raises interest rates, their local currency strengthens and the reverse is also true. The reason behind this is that a higher interest rate will encourage investors to shift their asset to the country in order to take advantage of the higher yields. Another fundamental that plays an important role in impacting the trading market is the employment situation. That is, strong employment is a good gauge of a strong economy, while weak employment shows an economy that is struggling. When an economy is struggling, it is likely that it will lower interest rates and this will then undermine the value of its currency. Let us turn our focus now to trade balance. This economic fundamental can influence the value of a country’s currency. That is, a large negative trade balance can cause a weak currency as commercial interests are forced to continually sell large amounts of the country’s currency. Finally, the Gross Domestic Product (GDP) of a country can impact the currency market. The GDP is a reflection of the overall economic activity of a country and traders follow this data very closely. A higher GDP shows a stronger economy, which in turn leads to higher interest rates and generally, a stronger currency.
Fundamental analysis is very useful in determining overall trends, if not exact prices. As an example, unemployment figures can give a good idea of the health of a countries economy, especially over a period of time as increases and decreases are noted. However, a single unemployment report is insufficient to determine an entry and exit strategy for a particular asset. Instead, several fundamental data points are often combined to come up with a general trend and technical tools are then used to determine exact entry and exit points.
Technical analysis plays an important role in helping you to predict the future price movements in the market. It is based on the premise that the historical price action of an asset can be used in order to predict the future price action of that asset. Since the Forex market has a large volume of transactions occurring over a period of 24 hours, using technical analysis is an ideal tool to use in order to understand the market movements.
In technical analysis, price action is depicted visually on a trading chart. Traders can use various tools in order to help them predict the future price movements of the asset. This includes identifying trends, support and resistance as well as many other mathematically derived indicators such as the RSI (Relative Strength Index) and the MACD (Moving Average Convergence Divergence) indicator. There are a wide variety of tools that one can use for technical analysis to assists your trading decisions in the Forex as well as other financial markets.
One of the key characteristics of the financial markets is that price trends often repeat themselves. Since there are a large number of traders in the Forex market including banks, insurance companies, hedge funds and private investors, there is very rarely a situation where inconsistencies can be exploited in the currency markets. Any disconnects or movements that go against the market trend are generally corrected within seconds or less.
Technical analysts, therefore, enjoy Forex trading since all the known information is already included in the Forex exchange rates. With so few discrepancies in the Forex market, technical analysts can focus on the trend of the market as well as the flow of capital.
Technical indicators are the tools that helps the traders analyze the market and to predict the future price movements of assets. Today, there are hundreds of indicators that one can use in order to determine the future direction of currency exchange rates.
In technical analysis, a trader needs to determine if a currency pair is in a trend. That is, is the currency pair consistently moving in one direction, either up or down, or is it moving horizontally or sideways. In order to determine the trend of a currency, you can draw trend lines that connect important historical price points on a trading chart. These points play a vital role as they clearly show where the price has been unable to move either higher, which is referred to as resistance, or lower which is referred to as support. With the support and resistance points, you are able to determine when a trend is beginning, when it could continue and when it may be ending
In Forex trading, the major currency pairs such as the USD/JPY and the EUR/USD, have shown historically that they have the greatest tendency to trend. Meanwhile, some minor currencies have often shown a range or a horizontal trend. The benefit of having this information enables traders to take advantage of the trends of a currency pair and to trade accordingly.