In order to make our decisions on which direction the price of a given currency pair Forex in which we invest we can use primarily 2 types of analysis that we will discuss below:
Types of Analysis
There are two types of analysis that can leverage for trading in Forex:
- Fundamental analysis
- Technical analysis
There has always been a debate about which of these two types of analysis is better, but to tell the truth, you must know a little about both.
A major exists that could be considered as a third type of analysis: relational analysis is a special case of fundamental analysis focused on real - time and enteder correlation with trends in currencies among themselves and with other markets, including commodities (gold, oil, etc).
Fundamental analysis
The fundamental analysis is a way of looking at the market from the point of vieweconomic, social and political that affect resources and demand. In other words, with fundamental analysis you see which economy is going well and what is, on the contrary, through a losing streak.
Fundamental Analysis monitors the health of the economies of the countries and their influence on the price of currencies
The idea behind this type of analysis is that if the economy of a country is good and stable, its currency will also go well. This is because the better the economy of a country, other countries will have more confidence in their currency.
For example, the US dollar (USD) has been losing strength because the US economy is weakening . As the economy worsens, the dollar will continue to decline.
Later in this Forex course, we'll show the most important specific events that manage price movements of currencies, for now, the important thing is to know that fundamental analysis is how to analyze a currency according to the strength of the economy the country concerned.
Technical analysis
The technical analysis is the study of the movement that tracks the price . In short we could say that technical analysis is the graphics. The idea is that each trader can observe the historical price movements and, on this basis, can determine at some level where the price will go in the future.
Noting the graphs, you can identify trends and patterns that can help you find good trading opportunities.
The most important thing you learn with technical analysis is to identify the market trend.Many people claim that "the trend is your friend" ( The trend is your friend ). The reason for this is that it is much more likely to make money when you can find a trend and trade in the direction of it.
Technical analysis can help find this trend in its early stages and therefore, provide good opportunities to open operations.
So what type of analysis is better in Forex?
This is the million dollar question !! As you progress on your journey through the exciting world of Forex market to find strong tendencies towards technical analysis or fundamental analysis.
You will find people who say they only care market fundamentalism and that any pattern found in the graphic is mere coincidence. On the other hand, you find people who say it is the technical analysis to which you should pay attention
Do not be fooled by these extremist people. Any analysis is actually better than the other!To become an expert in Forex, you need to know how to effectively use both types of analysis.
If you do not think it's important to know both analyzes, let us show you how the focus on a single type of analysis can become a disaster:
- Suppose you are looking graphics and is an excellent opportunity to open an operation.
- You proceed to open the operation with a big smile from ear to ear!
- From time to time, the operation moves 80 pips in the other direction! Did you know that there was a decrease in the interest rate of the currency with which you were working and now all are operating in the opposite direction?
- The big smile from ear to ear becomes angry and start crying with graphics, you feel so angry that even decide to throw away your computer! Now you just lost a lot of money and a computer for having made the mistake of completely ignore fundamental analysis.
Remember how when you were a kid you were saying that extremes are bad?
Well, you should know that this also applies in Forex when deciding what type of analysis used. Do not rely on only one. On the contrary, it is important to learn to balance the use of both, because only then can take full advantage of your operations .