How to Use Fundamental and Technical Analysis in Forex Trading.
- August 1, 2021
- Posted by: Daniel Richard
- Category: Forex Trading
The forex analysis method is one kind of practice by traders to identify the market situation, such as which currency pair is stronger for profit. By analyzing the currency movement, traders make decisions for buying or selling. Traders usually use fundamental and technical analysis methods for exploring the market situation.
Generally, the trader uses one analytical method, either fundamental or technical analysis. But some traders use both of them. To be a successful trader and to earn vast amounts of profits, you have to analyze technical or fundamental methods properly. This article will be helpful for a better understanding of these two analysis methods.
What is Fundamental Analysis?
The fundamental analysis is a method where a trader can idealize the currency movement by analyzing the political, economic, and social situations. Traders who use fundamental analysis while trading do not predict the future currency value using the past price movement.
In fundamental analysis, the trader uses public data for evaluating the value of the currency. According to the investigation, traders can take the trading decision. It can be said that fundamental analysis is the pillar of analyzing the change of currency value. It also profoundly investigates market situations.
How to Use Fundamental Analysis?
Fundamental analysis is used for evaluating the currency movement in the forex market. Traders can easily identify which are the main reasons for currency movement by using fundamental analysis. Due to changes in supply and demand, the value of the currency rate is changing every moment, and the social, economic, and political factors affect supply and demand.
The Economic Calendar
An economic calendar is an essential tool for forex dealers because they use it before starting or stopping a trade. Generally, the forex broker offers the economic calendar for traders. It is the source of financial information published by following a schedule.
The economic calendar is so crucial for knowing the important news announcement and also the next date of the central banks meeting. By observing this calendar, traders can make the right decision while marketing.
You will get all the schedules of economic events there. There are five categories of economic calendars, which are event time, name of the event, the actual figure, the forecasting figure, and the figure of the previous calendar. You should follow these five categories of economic calendars.
How to Use the Economic Calendar?
The central banks, the private companies, and the reserve banks release the financial information in this calendar to show economic performance. The reaction of the market may go against the currency value. For instance, if the data release unfavorable information, the economy will not do well, and the currency rate will fall.
However, the reaction of the market may be favorable. For example, if the economic calendar releases positive news, the currency rate will increase, and the economy will improve. Therefore, if you want to be a successful businessman, you have to follow specific requirements. The ability to avoid losses is also crucial for a trader. Let’s see some critical guidelines for using the economic calendar:
- Always check the Calendar in advance
Checking the calendar regularly is so effective for successful traders. You have to check the economic calendar daily or weekly. So, you must have an economic calendar. After reviewing this, note down the important data, and this information will help you avoid unnecessary things.
- During the release time, you should avoid the market
It is so challenging to say the exact release number and what type of reaction it will be. The reaction may be favorable or against the currency rate. The most volatile part of the market is before and after thirty minutes of releasing the data. It is the most sensitive period for traders. Most of the dealers lose most of their money by trading at this time. So, be conscious of avoiding the market during the release time.
- Understand the market value
In the forex market, it is most important for the trader to identify the data which causes the major currency movement. If you observe the economic calendar, you will get three categories of data which are low volatility, medium volatility, and high volatility. The forex brokers represent these three data differently. As a trader, you should give serious attention to these three categories because these will help you to understand the market value.
The Top 5 Market Moving Events
To better understand the economic calendar, as a trader, you have to learn five essential market movement events, which are (GDP) growth rate, the decision of interest rate, private sector spending, inflation, and finally, employment on both un-farm and farm payrolls. If you are a beginner in this sector, having a deep knowledge of these five events is a must for understanding the market.
Read the News
Many fundamental analysis tools do not exist in the economic calendar. News is an important source of fundamental analysis in forex trading. It will be easy for you to predict the market situation if you read the news properly.
If you want to be a successful forex trader, both fundamental and technical analysis are needed for you. It would help if you combined technical tools with fundamental research. The combination of these two analyses will help you to make the right decision. If you are new to forex, you should first learn about the analytical tools for forex trading.
What is “Technical Analysis”?
Technical analysis is a technique of identifying the future currency movement by using the history and the past price movement in the market. That means if a trader can research the past price action, he/she will be able to forecast the future market movement. The trader who follows this analysis believes in past price action.
Two significant facts are essential in technical analysis, which are identifying the trend and identifying the support and resistance by using the price charts. Generally, you will find three characteristics of the market, namely move down, move up, and sideways.
How Can You Use Technical Analysis?
Though the market always never goes in a straight line, it follows the rules and theories. So, you can predict the price movement by analyzing the technical tools. It is not possible to say indeed about the next price action. However, it will be easy for you to idealize the next price movement by technical analysis.
The chaotic behavior is found in another sector, like the prediction of price movement. Almost every trader believes that business relies on probability. So, your prediction may not always be correct; sometimes, it may be right, or sometimes wrong. When the chance is favorable for you, you can start trading.
If you think that the probability of risk is more than reward, you should not trade in this situation. On the other hand, when there is a suitable chance for trading, which will be profitable, you can trade without thinking about anything
Traders must have the ability to tackle risk management. There is no secret magic that will help you to get a massive profit in trading. Traders who follow technical analysis always observe the current price condition and take trading. There are some remarkable technical tools that are very helpful for successful trading. So, let’s see these:
- Using Support and Resistance
If you have profound knowledge about support and resistance, you will understand how the forex market works. Support and resistance level is drawn on a chart depending on the recent or past price movement. In this chart, the upper point is called resistance, and the lower point is called support.
Support and resistance is a remarkable tool for technical analysis. The support level is suitable for buying, and the resistance level is favorable for selling. This chart follows the past price action. The support and resistance is one kind of technical analysis.
- Candlestick Charts
The trader uses the candlestick chart for making trading decisions which help to predict a short-term direction. When supply and demand directly link to price, the dealer’s emotions also influence. Traders make the candlestick chart based on the past price pattern to determine the price movement. Candlestick is a tool of technical analysis. You can easily analyze the price movement technically by using the candlestick chart.
- By Using Trendline
The trendline is the most popular tool in technical analysis that is easy to understand. If a trader can rightly draw a trendline, they will identify the future price movement. The upper line indicates the higher price, and the lower line refers to the lower price. Traders forecast the future price movement based on the past and recent price action. Therefore, by using trendlines, you can technically analyze the future market movement.
- Pivot Points
The pivot point is a popular method for determining the buy and sell signal, and it is also used for identifying the reversal points. The chart has been divided into several parts, and the middle point is the pivot point. The upper point of the pivot point is the resistance level, and the lower point is the support level. So, the pivot point is a technical tool, and you can easily identify the future market action by using this.
So, analysis is the best way to know about the future price, and this analysis may be technical or fundamental. If you perfectly analyze, both methods will be profitable for your trading.