Forex Technical Analysis vs. Forex Fundamental Analysis

The basic laws of supply and demand determine the movements in the value of a currency. The need for the currency is the fundamental factor that determines its value. If the demand for a currency is high, its value will also increase. On the other hand, if the supply of a currency is high, its value will eventually decrease.

Market supply and demand is basically determined by many factors, which makes predictions very difficult. Some of the factors are:

• Trade flow
• Capital flow
• Hedging needs
• Speculative needs

Financial markets can be studied by either applying a fundamental analysis or a technical analysis. The first one uses basic economic conditions in order to make predictions on the future movement of the market, whereas the second one uses past prices for the same purpose.

Technical analysis is preferred by investors with a focus over the short term, whereas fundamental analysis is typically used by traders, who aim at establishing both the right current and future value of the currency.

Fundamental Analysis Basics

This type of market analysis takes into consideration the economic, political and social factors that may have any effect on changes of supply and demand. Fundamental analysts apply a macro approach of studying interest rates, inflation, unemployment, and growth rates of the economy. After the necessary data is obtained, predictions on the future performance of the target currency are made.

If you select implementing fundamental analysis, you should have in mind that it is a somehow cumbersome process since a lot of data should be collected and analyzed.

News releases also influence the future movement of a currency's value, so fundamental analysts should always stay in touch with the latest announcements.

Fundamental analysis can use such tools as balance of payments and purchasing power parity (PPP) in order to evaluate a currency.

Capital flows and trade flows represent the major forces that may influence the movement of exchange rates. These factors are part of the balance of payments of a country, which aims to present how much of the currency is demanded over a particular period of time. In order for a currency not to change the value it has now, the balance of payments should be equal to zero. If capital is exported out of the country at a higher rate than it is entering, the balance of payments will have a negative value.

Technical Analysis Basics

The introduction of technology has led to the technical analysis gaining higher popularity among forex market traders. It uses past data on a currency in order to make predictions on the future movement of its price. One of the major assumptions underlying technical analysis includes the claim that past trends tend to repeat in the future. Additionally, technical analysts assume that the price of the currency reflects. This leads them to conclude that in order to make good decisions, one should study the price action that takes place on the market.

Technical analysis is a preferred tool by short term traders in currency markets since market participants tend to cause the short-term fluctuations in the prices of currencies.

Technical analysis makes a wide use of different types of charts. They give an illustration, which facilitates traders in finding patterns and potential profits. Different indicators are applied to provide information on the emotional extremes of both buyers and sellers (e.g. moving averages, oscillators and etc.).

Another underlying premise of technical analysis is that markets tend to trend. This stresses the importance of being able to notice trends in their early stage.

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