forex-online-trading

Foreign Currency Trade – Fundamental and Technical Analysis

Sanjay Johari

Foreign currency trade is based on anticipation of price movement. Traders use various means to predict how the market is going to behave; particularly in which direction the prices are likely to go. More serious traders also try to predict the likely price variation and the timeframe. Based on this projection and anticipation of price movement the traders take their positions.

The Traders buy a foreign currency in anticipation of upward price movement on the hope of selling it at a higher price. In case they expect a downward price movement of a particular currency, they sell the currency on the hope of buying it back at lower price.

The accuracy of the prediction of price movement will determine how much the trader is going to earn. The whole game plan of forex trade is correctly anticipating the price movement – at least its direction, and recognizing when the anticipated movement starts and ends. The price fluctuation is not uniform over time. At times it tends to play in a narrow range and then shoots out sharply in upward or downward direction. The large price movement in either direction is called trending. The prices are said to be in a trading zone when they fluctuate in a narrow range.

Higher profits can be made price is in trending mode. The trader has to recognize that the trend has started and enter into a deal. He has to recognize again when the price trending is over and close the deal to earn profit.

The trader can study the price movement using fundamental analysis, technical analysis, or a combination of these basic analysis techniques. There are millions of factors that can influence price movement. In fundamental analysis the trader keeps an eye on major factors that can affect the prices significantly. These factors could be economic, political, environmental, social and many other such issues. Government policies, economic conditions, demographic changes can all influence the market. The trader who uses fundamental analysis has to keep a watch on the major influencing factors.

On the other hand technical analysis is based on price movement history. By studying the existing price movement its future behavior is predicted. The price of a foreign currency is result of so many factors – factors external to the market as well as combined sentiments of the traders. Technical analysis is based on the assumption that the market action discounts everything. This will mean that at any moment the price represents sum total of all the factors by which it is affected. Moreover, it is believed that the collective psychology of the traders produce recognizable patterns in price movements. By studying these patterns it is often possible to predict the future price behavior. The history of price movements tend to repeat, therefore by studying past patterns it is possible to correlate patterns with large movements. The price patterns can indicate trending and reversal points. These are just the points the trader needs to earn profit.

Which analysis is more reliable? Well, this is a matter of opinion. Both methods have their merits and demerits. It should be remembered that fundamental analysis and technical analysis are tools in the hand of the trader. It is up to the trader to make best use of them. Most of the traders rely on both the tools to varying degrees. The trader also depends upon his own experience, his hunch or gut-feeling and suggestions from different source.

Based on basic analysis people have developed many “strategies” for forex trading and software to implement those strategies. By following one of those strategies the trader does not have to do much analysis by himself – he just does what the strategy suggests. I have not seen any strategy that is always correct. It is possible to have more correct moves and less number of incorrect moves. But it is always advisable to stick to one strategy. Working without a strategy or jumping from one course of action to another can be disastrous. Decide how you want to operate and stick to it. Confidence and experience you get from your sustained actions can be more valuable than profit you earn from the trade.

posted by Sanjay Johari @ 11:29 PM