In the following four lessons, we will explore these analyses in detail, but let’s start by introducing them:
- Technical analysis: The most popular trading method globally, with millions of dedicated technical traders. It focuses on price movements along different time frames. The trader’s target is to forecast future price changes based on the pair’s history, which is written on the forex charts. Prices reflect market conditions, and the trader assumes that history repeats itself.
Example: Say you are asked to predict the weather in New York tomorrow. Data on the temperatures during the past week and weather charts of N.Y. could have helped you, right? Your forecast will never be 100% certain, but with this data, there’s a good chance you will predict the proper temperature range.
Technical analysis is the best method, visually speaking. It is excellent for identifying trading opportunities. The problem is that technical analysis is also very subjective! Each trader has his ideas and observations. Data appearing on the charts is the same on all trading platforms, but analyses and interpretations differ from trader to trader.
- Fundamental analysis: Perfect for long-term traders. Great for people who consider themselves investors and heavy players. However, even if you don’t belong to this group, you must familiarize yourself with fundamental analysis because it will help you to increase your chances for success dramatically. The fundamental analysis relates to economic data releases, global economic, social, and political events, and their influence on foreign exchange markets. For instance, take interest rates, inflation, unemployment rates, elections, natural disasters, etc… As conditions in a given market improve, more global investors will invest in this market, causing its currency to rise.
There is no such thing as the best method, one that sweeps away the others. A combination of the two of them is always worthwhile. At the end of the day, you should work with the system that is most comfortable and rewarding for you. Every system has advantages and disadvantages. Our team likes combining fundamental analysis with technical analysis. While analyzing market events, we base our actions and decisions on the technical analysis of the price movements. We also like executing short-term trades based on technical analysis, especially when recognizing clear patterns that can yield nice earnings.
Important: You may, and are even advised to mix the different methods. If you analyze the market with technical tools, fundamental analysis will still improve your performance, and if you are a long-term investor, making decisions based on fundamental analysis, technical tools will boost your success.
If you plan to buy GBP/USD, basing your decision on technical analysis, but suddenly the fourth biggest bank in Great Britain collapses, you can be damn sure that the trend is about to change directions, big time!
Let’s review what you learned so far.
Please don’t skip this; it will help you get comfortable with everything you learned so far and will get you used to using the trading platform of your choosing. Now, practice like a real trader!
Go to your demo account and start trading:
- Focus on trading is one of the majors. Observe it. Get used to the way it appears on your screens. Check out its buy/sell prices and its Base/Quote currencies.
- Look for a variety of pairs. Check for other majors, minors, exotic pairs
- Look for a timetable that presents the different time zones in all major sessions.
- Find an option that lets you choose your chart type. Focus on candlestick charts; notice the different shapes of sticks. Identify as many types of sticks as you can.
- Look for an uptrend, downtrend, and a ranging trend on a chart.
- Find a ” Tools ” window and look for a “Trendline” option. Draw an assisting line along one of the trends you see (just like you learned how to do it).
- Choose different time frames to watch a certain pair. Notice how charts of the same pair look different in different time frames.
If you are less interested in fundamental trading strategies, you can skip straight to Chapter 6 – Technical Forex Trading Strategies and begin with technical analysis.
Remember, the best way to trade Forex signals is by using both Fundamental and Technical trading strategies together.