Forex Trading Beginners - Technical vs. Fundamental Analysis
Submitted by akordionline on Sat, 09/25/2021 - 16:36
For those who want to become a trader, one of the first things that should be taken care of is the building (and following) of a comprehensive trading strategy. This strategy should be based on your trading style, risk aversion, trading capital, and financial goals. As well as the above, the method by which you’re going to analyse the market should be an essential component. TYPES OF MARKET ANALYSIS There are three major types of market analyses that will help you decide when and how to trade: Fundamental analysis Technical analysis Sentiment analysis Fundamental analysis Fundamental analysts base their analyses on the study of economic, social, as well as political forces that affect the supply and demand of a financial asset and the risks that influence its price. Technical analysis Technical analysts use technical trading strategies to analyse the price movement of an asset with market charts in order to determine profitable entry and exit points. Sentiment analysis Sentiment analysis relies more on the assessment and understanding of how investors think, and how their moods and expectations impact the markets. After all, people are the ones creating a market by either buying or selling an asset. It’s logical to suppose that analysing their way of thinking and reacting will help making better trading decisions. WHICH IS THE BEST MARKET ANALYSIS? Most beginner traders often wonder which type of analysis is the most profitable and effective way to invest, but is it really possible to answer? Who can say that one method is better than another one? After all, they all look at the market in a different way. Some traders would say that you can’t use fundamental analysis without also relying on technical analysis. Others would say that you’re either a fundamental analysts or technical analyst. As you continue trading, you will likely come to realise that you often need to combine aspects from all types of analyses to create a profitable trading approach. HOW TO APPLY FUNDAMENTAL ANALYSIS ON CURRENCY PAIRS? Because fundamental analysts believe that information isn’t necessarily reflected in the price of an asset, they assume that prices and values are different. Thus, this type of analysis looks at the forces that affect the supply and demand of an asset to know where the price of this asset is heading. Once fundamental analysts have determined the intrinsic value of an asset, they can compare it with the current asset’s price to know if the asset is over – or undervalued. If the price of an asset is undervalued, then a fundamental trader would probably decide to buy the asset, as they believe the price should go up. Conversely, if it is overvalued, they should sell the asset, because its price could go down. This is how fundamental traders spot potential profitable trading opportunities. WHAT IS THE IMPACT OF CHANGES IN THE SUPPLY AND DEMAND RELATIONSHIP ON CURRENCIES? Fundamental analysis in Forex is all about determining what economic factors can affect supply and demand of a country’s currency. To put it simply, if there is increasing demand, or a reduction in supply, then the price of a currency will certainly rise. Conversely, if there is a reduction in demand, or an increase in supply, then the value of a currency will surely fall. So, the best way to control systematic risk in the Forex market is to follow an economic calendar. This calendar will help you understand the impact of the weakness/strength of a country’s economic stance on its currency. Usually, when a country’s economic outlook is positive, its currency strengthens against its counterparts, as more foreign investors are looking for investment opportunities in this country – and vice-versa. FUNDAMENTAL ANALYSIS VS TECHNICAL ANALYSIS In summary, fundamental analysis is more of a long-term approach, while technical analysis helps in determining more accurate entry and exit points over the short-term. Some would say that their goals are different, as fundamental analysis is closer to investing, while technical analysis is more about trading. That said, even though both types of analyses are seen as opposing styles, it’s better for you to know both trading methods. It will enable you to create a more efficient and profitable trading strategy: a technical understanding of the market, and a fundamental knowledge of which forces drive it. If you aren’t sure about the level of your knowledge in both areas, you should consider taking an online financial trading course to improve your knowledge and skills.
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