In this article we’ll discuss the two investment strategies used by FOREX traders: Technical Analysis and Fundamental Analysis.
Just as in equity markets, the two basic types of strategy to predict currency's future prices in the FOREX market are Technical Analysis and Fundamental Analysis. But among FOREX traders the most common strategy used by far is Technical Analysis. However, we’ll take a look at the two types of investment strategies used in FX trading.
FX market is the perfect market for Technical Analysis. Long-time movements in the currency market generally correlate with the economic cycles. Economic cycle tends to repeat themselves therefore can be predicted with some fair degree of accuracy. Repeatation is the key to Technical Analysis, since the entire premise of technical analysis lies in using historical price movements to forecast the future price movement. The use of Technical Analysis in the FOREX market is much the same as in other trading markets, price is believed to already reflect all news which would have had an effect on the currency’s value. Technical analysts in the FOREX market evaluate price trends. Most small- to medium-sized investors in the FOREX markets use the form of investment strategy known as Technical Analysis. This technique stems from the assumption that all information about the market and a particular currency's future fluctuations can be found in the price chain. In other words, all of the factors which have an effect on the price of the currency have already been considered by the market and are therefore reflected in the price. The investor who uses Technical Analysis bases his investment decision on three essential suppositions: that the movement of the market inherently considers all factors; that the movement of prices is purposeful and directly tied to these events; and that history repeats itself. This investor considers the highest and lowest prices of a currency, its opening and closing prices, and its volume of transactions. He or she does not try to predict long-term trends, but simply looks at what has happened to that currency in the recent past, and supposes that the small short-term fluctuations will generally continue as they have before. Some of the more common forms of technical analysis used in the FOREX market include Moving Averages, Stochatics, Bollinger band, Elliot Waves, Fibonacci studies, and Pivot points e.t.c. Many technical analysts combine these studies in order to make more accurate predictions. The most frequent combination is that of the Fibonacci studies with Elliott Waves. Although investing in the FOREX using short-term strategies requires definite assiduousness, experienced investors who utilize a technical analysis can generally feel confident that their ability to read the daily fluctuations of the currency market are sufficient enough to supply them with the knowledge necessary to make informed and prudent decisions.
Fundamental Analysis is a method of forecasting future price movements of a financial market based on economic, political, and environmental and all other related factors, as well as all other factors that will affect the demand and supply of the financial instrument. Fundamental Analysis in the FOREX market is often very complex, and it's usually only used to predict long-term trends; some investors, however, do trade short-term based strictly upon news releases. There are many different fundamental indicators of currency values, and they’re released at various times. An investor who utilizes Fundamental Analysis studies the current situations in the country of the currency, including such things as economy, political situation, and other related information. A country's economy can be quantifiably defined by measurements of its Central Bank's interest rate, Gross Domestic Product (GDP) - is considered to be the broadest measure of a country's economy, and it represents the total market value of all goods and services produced by that country in a given year. Since the GDP figure itself is a lagging indicator, most investors focus on the two reports that are issued in the months before the final GDP is released: the advance report and the preliminary report. Significant revisions from one report to the next can often cause considerable market volatility; Consumer Price Index (CPI) - is a measure of the change in the prices of consumer goods across 200 different categories. This report, when compared to a nation's exports, can be used to determine whether a country is making or losing money on its products and services. The exports must be carefully monitored as well, however, because their prices often change relative to a currency's strength or weakness, A country’s Retail Sales report - measures the total receipts of all retail stores. This report is particularly useful because it’s an indicator of broad consumer spending patterns, and is adjusted for seasonal variations. It can be used to predict the performance of more important lagging indicators. It’s also valuable in assessing the immediate direction of a country’s economy. Revisions to advance reports of retail sales can cause significant volatility, The Industrial Production report - shows the change in the production of factories, mines and utilities within a nation. It also reports their 'capacity utilizations', which are the degrees to which the capacities of the factories are being utilized. Traders using this indicator are usually concerned with a nation’s utility production, its unemployment level, its tax policy and the rate of inflation. It's important to not only look at the numbers, but to also take the time to know and understand what they mean and how they affect a nation's economy. When properly used, these indicators can be a valuable resource for the FOREX investor. The prudent investor also knows, however, that less measurable conditions and occurrences can also impact a nation’s economy. He or she must furthermore keep in mind the expectations and anticipations of other market participants. Just as in any stock market, the value of a currency is also based in large part on the perceptions of and anticipations about that currency, and not solely on the reality of its condition.
Just as in equity markets, the two basic types of strategy to predict currency's future prices in the FOREX market are Technical Analysis and Fundamental Analysis. But among FOREX traders the most common strategy used by far is Technical Analysis. However, we’ll take a look at the two types of investment strategies used in FX trading.
FX market is the perfect market for Technical Analysis. Long-time movements in the currency market generally correlate with the economic cycles. Economic cycle tends to repeat themselves therefore can be predicted with some fair degree of accuracy. Repeatation is the key to Technical Analysis, since the entire premise of technical analysis lies in using historical price movements to forecast the future price movement. The use of Technical Analysis in the FOREX market is much the same as in other trading markets, price is believed to already reflect all news which would have had an effect on the currency’s value. Technical analysts in the FOREX market evaluate price trends. Most small- to medium-sized investors in the FOREX markets use the form of investment strategy known as Technical Analysis. This technique stems from the assumption that all information about the market and a particular currency's future fluctuations can be found in the price chain. In other words, all of the factors which have an effect on the price of the currency have already been considered by the market and are therefore reflected in the price. The investor who uses Technical Analysis bases his investment decision on three essential suppositions: that the movement of the market inherently considers all factors; that the movement of prices is purposeful and directly tied to these events; and that history repeats itself. This investor considers the highest and lowest prices of a currency, its opening and closing prices, and its volume of transactions. He or she does not try to predict long-term trends, but simply looks at what has happened to that currency in the recent past, and supposes that the small short-term fluctuations will generally continue as they have before. Some of the more common forms of technical analysis used in the FOREX market include Moving Averages, Stochatics, Bollinger band, Elliot Waves, Fibonacci studies, and Pivot points e.t.c. Many technical analysts combine these studies in order to make more accurate predictions. The most frequent combination is that of the Fibonacci studies with Elliott Waves. Although investing in the FOREX using short-term strategies requires definite assiduousness, experienced investors who utilize a technical analysis can generally feel confident that their ability to read the daily fluctuations of the currency market are sufficient enough to supply them with the knowledge necessary to make informed and prudent decisions.
Fundamental Analysis is a method of forecasting future price movements of a financial market based on economic, political, and environmental and all other related factors, as well as all other factors that will affect the demand and supply of the financial instrument. Fundamental Analysis in the FOREX market is often very complex, and it's usually only used to predict long-term trends; some investors, however, do trade short-term based strictly upon news releases. There are many different fundamental indicators of currency values, and they’re released at various times. An investor who utilizes Fundamental Analysis studies the current situations in the country of the currency, including such things as economy, political situation, and other related information. A country's economy can be quantifiably defined by measurements of its Central Bank's interest rate, Gross Domestic Product (GDP) - is considered to be the broadest measure of a country's economy, and it represents the total market value of all goods and services produced by that country in a given year. Since the GDP figure itself is a lagging indicator, most investors focus on the two reports that are issued in the months before the final GDP is released: the advance report and the preliminary report. Significant revisions from one report to the next can often cause considerable market volatility; Consumer Price Index (CPI) - is a measure of the change in the prices of consumer goods across 200 different categories. This report, when compared to a nation's exports, can be used to determine whether a country is making or losing money on its products and services. The exports must be carefully monitored as well, however, because their prices often change relative to a currency's strength or weakness, A country’s Retail Sales report - measures the total receipts of all retail stores. This report is particularly useful because it’s an indicator of broad consumer spending patterns, and is adjusted for seasonal variations. It can be used to predict the performance of more important lagging indicators. It’s also valuable in assessing the immediate direction of a country’s economy. Revisions to advance reports of retail sales can cause significant volatility, The Industrial Production report - shows the change in the production of factories, mines and utilities within a nation. It also reports their 'capacity utilizations', which are the degrees to which the capacities of the factories are being utilized. Traders using this indicator are usually concerned with a nation’s utility production, its unemployment level, its tax policy and the rate of inflation. It's important to not only look at the numbers, but to also take the time to know and understand what they mean and how they affect a nation's economy. When properly used, these indicators can be a valuable resource for the FOREX investor. The prudent investor also knows, however, that less measurable conditions and occurrences can also impact a nation’s economy. He or she must furthermore keep in mind the expectations and anticipations of other market participants. Just as in any stock market, the value of a currency is also based in large part on the perceptions of and anticipations about that currency, and not solely on the reality of its condition.
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