Use of Fundamental and Technical Analysis in Forex Trading

Use of Fundamental and Technical Analysis in Forex Trading

In order to determine whether the forex market is favorable for a trade or not, professional forex traders make use of sound and well established techniques. Most of the professional traders depend on analytical techniques to determine the nature of the currency market at the moment, so as to find a situation that is ideal for opening a trade.

In order to become a successful forex trader, you need to learn how to assess and analyze the market. Also one must find out what are the various techniques used by professional forex traders to do this kind of an analysis. Forex trading is inherently based on market research and without market research trading in forex is not possible. There are basically tow fundamental ways by which market research can be done. These are Technical Analysis and Fundamental Analysis. Let us discuss each of these techniques and understand how they can be used to don market research.

Fundamental Analysis:

The first and the foremost technique that can be used to research the market is Fundamental Analysis. The basic aim of this technique is to analyze the social, economic and political situation in a nation in order to determine the stability in the value of the currency of that country. The technique also involves finding a relationship between the factors listed above and the value of the currency in order to determine the future value of the currency in question. It is an obvious fact that a country having a growth rate of 8% would have a currency that is valued higher than a country having a growth rate of only 4%. Similarly in terms of the stability of the economy of a nation, a nations' currency such as that of America is likely to be stronger than that of an underdeveloped nation such as Nigeria due to the stability in the economy as well as the political stability in the nation. Thus fundamental analysis basically deals with creating a functional relationship between the health of a nation in and the currency of that nation.

Technical Analysis:

This technique involves use of methods that aim to understand the forex market at its grass root level. It involves the study of the movement of prices of a currency pair and long term analysis of the pattern generated by the movement in order to predict the future value of the currency pair. By studying the long term charts showing the movement of the currency pair in question, one can determine the factors that lead to the rise or fall in the value of the currency pair. The major objective of this technique is to determine the long term trend that a currency pair follows. Once a trend has been identified, the information can be used to trade currency in the forex market.

From the above discussion, it can be very easily concluded that to be successful in forex trading one needs to understand the importance of analysis, and those who are well versed with techniques of market analysis are bound to earn great profits in the forex market.

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