Forex Market Trading: What is the Best Method?
There are two basic methods for forex market trading analysis. When starting out in forex trading, you need to understand both of them in order to decide which method is the best for you. Then you need to know how to apply that method to your trading system or strategies.
The two methods are known as “fundamental analysis” and “technical analysis.” Let’s look at fundamental analysis first.
Fundamental Analysis For Forex Market Trading
Fundamental analysis is based on the assumption that the underlying forces driving changes in currency values are related to the economic strength and financial performance of the two nations whose currencies you are trading as a pair. In other words, one currency will rise in value relative to another currency when the first country’s economy shows signs of strengthening or the second country’s economy shows signs of weakening.
Trading based around this type of analysis relies on market news and the interpretation of the many signs of economic strength or weakness. However, not many traders rely entirely on fundamental analysis these days. It is difficult to get a handle on all of the different factors involved, and the news is often unpredictable. It is possible for traders to make money focusing mainly on this method if they have a keen interest and involvement in international economic and financial developments. But they will most likely still use our second method some of the time.
Technical Analysis For Forex Market Trading
Most traders who are not closely involved in national economic news prefer to use the second method, technical analysis. This method is based around using charts and indicators to identify changing and continuing trends in the market. Most traders have systems relying on identifying charts and patterns. In general, these systems assume that patterns will repeat and that trends are predictable.
There are several different types of charts, but they mostly display the same data (i.e. currency values) in different formats. Most people find candlestick charts easiest to read because they are very visual. They display the opening, closing, high and low prices of a currency pair over a certain period.
You can adjust the period that a chart covers. It is a good idea to do this when you think you have spotted a trend or pattern that fits your system. For example if you generally look at hourly charts, check your data by focusing down to 15 minute and even 5 minute periods to be sure that the signs are right there, before you open your trade. If you usually use daily charts, check the 4 hour and hourly charts, too.
It is important to keep in mind that even the clearest pattern can be upset if major news is suddenly released indicating a move in the opposite direction. So even the biggest fans of technical analysis will at least keep an eye on news alerts. Most people check a daily calendar to see when reports and data are due to be released in the countries whose currencies they trade.
Try to get a grasp of both types of analysis before deciding which one is best for you. Then concentrate on your chosen method, but without completely ignoring other factors. This will give you the best chance of success in forex market trading.
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