Technical analysis and fundamental analysis are the two basic
areas of strategy in the FOREX market which is the exact same as
in the equity markets. However, technical analysis is by far the
most common strategy that is used by individual FOREX traders.
Here is a brief overview of both forms of analysis and how they
directly apply to forex trading:
Fundamental Analysis If you think it's hard enough to value one
company, you should try valuing a whole country instead.
Fundamental analysis in the forex market is often an extremely
difficult one, and it's usually used only as a means to predict
long-term trends. However it is important to mention that some
traders do trade short term strictly on news releases. There are
a lot of different fundamental indicators of the currency values
released at many different times. Here are a few of them to get
you started:
* Non-farm Payrolls * Purchasing Managers Index (PMI) *
Consumer Price Index (CPI) * Retail Sales * Durable Goods
You need to know that these reports are not the only fundamental
factors that you have to watch. There are also quite a variety
of meetings where you can get some quotes and commentary that
can affect markets just as much as any report. These meetings
are often brought out to discuss any interest rates, inflation,
and other issues that have the ability to affect currency values.
Even changes in how things are worded when addressing certain
issues such as the Federal Reserve chairman's comments on
interest rates; can cause a volatile market. Two important
meetings that you have to watch out for are the Federal Open
Market Committee and Humphrey Hawkins Hearings.
Just by reading the reports and examining the commentary, it can
help FOREX fundamental analysts to get a better understanding of
any and all long-term market trends and also to allow short-term
traders to be able to profit from extraordinary happenings. If
you do decide to follow a fundamental strategy, you will want to
be sure to keep an economic calendar handy at all times so you
know when these reports are released. Your forex broker may also be able
to provide you with real-time access to this kind of information.
Technical Analysis Just like their counterparts in the equity
markets, technical analysts of the FOREX trading market analyze
price trends. The only real difference between technical
analysis in FOREX and technical analysis in equities is the time
frame that is involved in that FOREX markets are open 24 hours a
day.
Because of this, some forms of technical analysis that factor in
time have to be
modified so that they can work with the 24 hour
FOREX market. Some of the most common forms of technical
analysis used in FOREX are:
* The Elliott Waves * Fibonacci studies * Parabolic SAR * Pivot
points
A lot of technical analysts have a tendency to combine technical
studies to make more accurate predictions on your behalf. (The
most common method for them is combining the Fibonacci studies
with Elliott Waves.) Others prefer to create trading systems in
an effort to repeatedly locate similar buying and selling
conditions.
Choosing Your Strategy Most successful traders will develop a
strategy and perfect it over a specific period of time. Some
people will focus on one particular study or calculation, while
still some others use broad spectrum analysis as a means of
determining their trades. Most experts would likely suggest that
you try using a combination of both fundamental and technical
analysis, with which you can make long-term projections and also
determine entry and exit points. Of course, in the end, it is
the individual trader who has to decide what works best for him.
When you are ready to get started in the FOREX market, you
should open a demo account and paper trade so that you can
practice until you can make a consistent profit. Many people who
fail have a tendency to jump into the FOREX market and quickly
lose a lot of money because of a lack of experience. It is
important to take your time and learn to trade properly before
you start committing capital.
You also need to be ale to trade without emotion. You can't keep
track of all stop-loss points if you don't have the ability to
execute them on time. You must always set your stop-loss and
take-profit points to execute automatically, and don't change
them unless you absolutely have to. Make your decisions and
stick to them. Otherwise you will drive yourself and your
brokers crazy.
You should also realize that you need to follow the trends. If
you go against the trend, you are just messing with your money
because the FOREX market tends to trend more often than anything
else and you will have a higher chance of success in trading
with the trend.
The FOREX market is the largest market in the world, and every
day people are becoming increasingly interested in it. But
before you begin trading, make sure your broker meets certain
criteria, and take the time to find a trading strategy that
works for you.
About the author:
Giles Windholm is a trader, and a forex strategist. He writes
for ForexMachine.com
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