Forex trade – Technical analysis pros and cons

If you have ever been in forex business, you must have come across the technical and fundamental types of analysis. There is a lot of arguments concerning the two analysis methods technical and fundamental with every forex trader preferring one more than the other but other use both. The forex technical analysis method enables traders to understand the trend of the market by predicting the future prices by use of charts, and the process deals with the actual price movements. Fundamental analysis on the other hand use wide-range approach in Forex trade by using the environmental or political factors or events that may affect the currency.

Technical analysis is the most accurate method in foreign exchange business; it has three principles which are:

  • Prices have trends thus analyzing the patterns on the behavior of a currency is very useful.
  • The currency price reflects what is on the market that can affect it.
  • Patterns tend to repeat themselves.

Technical analysis pros

  • The method is very objective – technical analysis basis its focus on tools and charts and does not consider feeling but only facts.
  • Using the method makes it easy for you in making decisions since technical analysis provides you with actual currency price and how the market conditions.
  • Those who use the technical analysis method have useful information about the market trends and the current situation in the market and thus being in a position to know where to invest and where to risk money.
  • Technical analysis method points out the end of the market trend which helps you minimize losses or hold to profits. Monitoring the market currency trends is a vital information you need to survive in the forex market and earn more while losing less.

Technical analysis cons

Despite the benefits above the forex traders who use the fundamental analysis avoid the technical study due to the following reasons:

  • The method relies mostly on the assumption –the technical analysis methods depends on current market trends to predict the future prices which may not be accurate. Sometimes the prediction may be valid but if anything changes the users may incur severe losses.
  • The method uses charts which may not indicate the changing trends till the change occurs which is very dangerous for a foreign exchange trader. Before the tables pick the changing trends, the traders may lose almost a one-third of the ever-fluctuating forex market.
  • There is a possibility of forex market acting on patterns sometimes, but the market is very dynamic. If you rely on technical analysis sometimes, you might end up losing money since it uses the patterns in the market to predict the future prices which may not be true in certain circumstances. In, forex trade the trends might change, drastically and if you don’t notice immediately you miss a lot.

Once doing the forex business you can’t ignore the technical impact analysis brings on but when using it, you also need to be careful and even use the fundamental analysis to weigh the situation in the market. Relying on one method to analyze the market it might be dangerous since not all the times the system is correct. Make the analysis system be your servant not the master hence will enhance your success in the forex business.

Forex Fundamental Analysis

Forex trading is one of the most lucrative businesses in the world today. In most cases, you end up making money within a day or even some few hours. However, it can also be a risky business if one does not study the inequity market well. To study the market, one considers economic factors that affect the worth of a country’s currency in the Forex market. These factors include; interest rates, political events, unemployment rate, inflation rate and central bank policy among others. It is good to note that these factors change over time and the ability to analyze them is vital in the Forex trade.

Therefore, fundamental analysis is a method of Forex trade valuation. The investors use social, political, macroeconomic and macroeconomic factors to value stocks. Forex fundamental analysis tries to measures the value of a currency based on data found on the economic calendar. The economic calendar contains information and data on economic indicators and when their release date. Let’s now discuss each of the fundamental indicators.

Political factors

The political climate of a country affects its economic status to a great extent. This is because it affects both fiscal and monetary policies of a government. For example, when a country faces political tension the government restricts spending on its major investments. In some cases, the political tension results in civil war. The wars cause a destruction of property and major investments. For a country to finance destroyed property it has to borrow money. The borrowing results in cheap capital and hence lower interest rates. This has a major effect on the currency exchange rates. That is, the value of the currency falls due economic uncertainties. Hence as a Forex trader, it is good to consider this factor.

Macroeconomic factors

These are general economic factors that show the economic health of a country. They include interest rates and the goods and service that a nation produces. These factors have adverse effects on the Forex trade market. For example, when a country (let’s say Japan) has unique goods or services, most countries must convert their currencies to Japanese yen to access that good. This increases demand on the Japanese yen. An increase in demand raises the value of a currency in the Forex market. On the other hand if country import goods more than it exports, the value of its currency falls. Therefore, as an investor, you have to consider the balance of trade of a country for you to trade with its currency in the Forex trade market. Other economic factors one should consider is deficit and surplus and inflation rate.

Global monetary power

Here one considers the policies of major economies. These are the country that their currencies do well in the Forex market. By considering these economies and their policies one gets an idea of their money supply. Hence this can help in projecting interest rates, volatility of the stock market and emerging market growth potential. After understanding the global central bank policy, we compare them to the other economies. This helps to project the trends of the Forex trade. For example, low-interest rates on these banks show a risk in Forex market while high-interest rate s the opposite.

Forex analysis is a complex process when analyzing Forex trade. However, it is a more safe method which guarantees returns. All you have to do is master the basics and you will be successful.