There are two main types of analysis that traders use to read the market and develop trading strategies:
Fundamental analysis – looks at economic, political and social factors.
Technical analysis – Studies the charts to spot patterns.
Traders have been and are still debating which analysis is the best. In reality, you will need to understand both in order to become a Forex guru. There are many traders focusing just on technical analysis, but you have to understand the following rule: “What you see on the charts didn’t appear there by chance. It is thereby a fundamental reason!” .
A balanced approach is to use fundamental analysis to determine the underlying trend in a currency rate and then use the technical analysis to pinpoint the exact entry and exit points for a trade.
Fundamental analysis looks at the economic strength of countries, which is influenced by monetary, political and social forces. The better the current and future economic outlook for a country, the more foreign businesses and investors will invest resources into it. By investing, they are creating demand for the country’s currency as they are converting their currency and buying local currency.
And here comes one of the most fundamental currency rules: The higher the demand for a currency, the higher its value!
Let’s assume that bunch of billionaires from the U.K, are going to transfer their money into your country. Here you might go long on your currency against Sterling pounds and earn few pips. That’s how is the concept of Fundamental analysis.
Technical traders look at charts and analyze past price movements to predict future price movements. As you know, history tends to repeat itself. The same thing happens with economic cycles and price movements.
Just like you know a child is about to cry as soon as he raises his upper lip, technical patterns are used to predict price movements before they occur.
Technical analysts have identified and established many patterns, which help us to predict how prices would move.
In the chart above, you can see that whenever the price reaches a certain point (let’s say 1,000 level), it moves back down. Such a pattern is called the resistance. The next time the price reaches the resistance level, traders might want to go short (sell the base currency) as there is a good chance the price will reverse and go down again.
While not all resistance or other patterns from around whole numbers (like 1,000 in this example).
There are many ways to analyze the past price movements to predict the future prices, such as:
1-Resistance and Support line
2-MACD (Moving Average Convergence Divergence)
3-SMA (Simple Moving Average)
4-RSI (The Reletive Strength Index)