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Analysis Guidelines
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To evaluate
trading
opportunities
traders use
fundamental and
technical
analysis. Traders may choose to take a conservative low risk, medium risk or high risk approach by using limit orders and stop loss orders to manage risk in addition to employing fundamental and technical analysis. |
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Fundamental
Analysis
Fundamental analysis consists of macro, strategic assessments of where a currency should be trading based on virtually any criteria but the price action itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other fundamental elements. Fundamentalists track and study economic figures, political news, market expectations, monetary policy, Central Bank operations and market intervention and analyze it to predict it`s potential impact on the markets. Fundamental analysis alone is often insufficient to use when dealing with currencies, commodities and other "margined" products. This is because fundamental analysis does not provide for specific entry and exit points, and therefore makes it difficult to control risk when using leverage.
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Technical Analysis Technical analysis is probably the most common and successful means of making trading decisions and analyzing forex and commodity markets. It consists primarily of a variety of technical studies that can be interpreted to generate buy and sell signals and predict price patterns and market directions. It is a methodology that can be applied almost in any market. Chart reading is successfully enhanced by the use of computer-based statistical analysis which creates oscillating indicators showing over-bought/over-sold conditions, the pace and direction of momentum and the relative performance of one item against another or against the market. One part of this analysis is to analyze price charts to identify short, medium and long-term trends, pinpointing future potential trouble areas. Bar charts, point and figure charts, candle charts, swing charts, volatility and momentum or relative analysis are all tools that are available with a study of technical analysis and should lead to better investment profits given consistent and intelligent application . Differences between Fundamental and Technical Analysis Technical analysis differs from fundamental analysis in that technical analysis is applied only to the price of the market, ignoring fundamental factors. As fundamental data can often provide only a long term or delayed forecast of exchange rate movements, technical analysis has become the primary tool with which to successfully trade shorter-term price movements, and to set stop loss and profit targets. Fundamental analysis is probably more effective in predicting trends for the long term (longer than one year), while technical analysis is probably more appropriate for shorter time horizons (0-90 days). Support and Resistance Levels One use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by the chart and assessing where the market has encountered unbroken support or resistance in the past. For example if EUR/USD has established a resistance level at approximately 0.8705. In other words, EUR/USD has risen up to 0.8705 repeatedly, but has been unable to move above that point. The trading strategy would then be to sell EUR/USD the next time it gets close to 0.8705 with a stop placed just above 0.8705, say at 0.8720. It would be indeed a good trade if EUR/USD proceeds to fall sharply, without breaking the 0.8705 resistance. Hence a substantial upside can be achieved while only risking 10 or 15 pips (0.0010 or 0.0015 in EUR/USD).
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