There
are two basic approaches to analyzing the currency
market, fundamental analysis and technical analysis.
The fundamental analyst concentrates on the
underlying causes of price movements, while
the technical analyst studies the price movements
themselves.
Technical
Analysis
Technical analysis focuses on
the study of price movements. Historical currency
data is used to forecast the direction of future
prices. The premise of technical analysis is
that all current market information is already
reflected in the price of that currency; therefore,
studying price action is all that is required
to make informed trading decisions. The primary
tools of the technical analyst are charts. Charts
are used to identify trends and patterns in
order to find profit opportunities. The most
basic concept of technical analysis is that
markets have a tendency to trend. Being able
to identify trends in their earliest stage of
development is the key to technical analysis.
Fundamental
Analysis
Fundamental analysis focuses on
the economic, social and political forces that
drive supply and demand. Fundamental analysts
look at various macroeconomic indicators such
as economic growth rates, interest rates, inflation,
and unemployment. However, there is no single
set of beliefs that guide fundamental analysis.
There are several theories as to how currencies
should be valued.
Technical
Analysis or Fundamental Analysis?
Most traders with FXTSP abide
by technical analysis because it does not require
hours of study. Technical analysts can follow
many currencies at one time. Fundamental analysts,
however, tend to specialize due to the overwhelming
amount of data in the market. Technical analysis
works well because the currency market tends
to develop strong trends. Once technical analysis
is mastered, it can be applied with equal ease
to any time frame or currency traded.
