There are mainly two methods used to estimate the performance of the Forex market. In this article explains the two. The two methods are Technical analysis and fundamental analysis. Both methods vary to a great extend. But they can be used as a tool for the Forex trader. The two methods can be used to calculate the price or movement. In the technical analysis the technicians study the outcome while in the fundamental analysis the fundamentalist focus the reason or the source of market movement. For getting high quality results many booming traders join a combination of both methods.
Basics of Technical analysis
In technical analysis Forex trader studying the precedent market achievements and predicting the price movements and future market trends. It does not concern with what should happen in the market, rather it anxious with what has actually happened and build an explanation about the price of instruments used and the quantity of trading. By using this details create a chart which used as a primary tool for the trading. Technical analysis has a major advantage that the skilled analysts can simultaneously follow many markets and market instruments.
Technical analysis is build upon three important principles. They are
1. Market action discounts everything: It deals with the fact that the actual price is an indication of whole thing that is branded in the market and could affect it. For example, the case of supply and demand, political factors and market sentiment. On the other hand the pure technical analyst not concerned with the reason for any changes in the market but only anxious about the price movements.
2. Price move in trends: Technical analysis is used to recognize the significant patterns of market behavior. There is a possibility that these patterns will construct the predictable outcome. Also there are several other standard patterns that replicate themselves on a constant basis.
3. History repeats itself: Over 100 years many Forex chart patterns have been identified and categorized in a manner in which the repeated patterns leads to the termination that individual psychology varies slightly over time.
Mainly Forex charts are based on market action concerning price. There are five categories in Forex Technical analysis theory.
• Indicators( oscillators, example:
Waves( Elliott wave theory)
Number theory in stock and forex trading ( Fibonacci numbers, Gann numbers) Relative Strength Index( RSI)
• Gaps( high-low, open-closing)
• Trends( following moving average)
The tools used in Technical analysis are
Relative Strength Index (RSI)
RSI used to calculate the ratio of up-moves to down-moves and normalize the calculation. So the index of RSI is described within a range of 0 and 100. In case the RSI is 70 or more, then the equipment is said as overbought, a condition where the prices have risen to a great extent than market outlooks. If RSI is 30 or below, it is taken as a sign that the equipment is possible to be oversold, a condition where prices decrease more than the market outlooks.
This is used to point out the overbought or oversold situations of instrument on a scale of 0 to 100%. This pointer is based on the monitoring that in a strong rising trend, so period closing prices focus in the period’s higher parts. On the other hand, as prices go down in an extreme down trend, the closing prices seem to be closer to the period range’s lowest. Stochastic measures create two lines %D and %K that signal the chart’s overbought/oversold parts. The variation amid the stochastic lines and the underlying instrument’s price action indicates a strong trading signal.
Moving Average Convergence Divergence (MACD)
MACD is used to plot a couple of momentum lines. MACD line is a measure of variation between 2 exponential dynamic averages and the trigger line or signal that is an exponential dynamic average of the variation. In case trigger lines and the MACD cross, then it is considered as an indication that there is going to be an alteration in the trend.
Fibonacci numbers : This number series (1,1,2,3,5,8,13,21,34) is obtained by the addition of first two numbers to get the third one. The popular Fibonacci retracement number is the ratio between a number and the next larger number, which comes to 62%. The converseof 62% that is 38% is also considered as a Fibonacci retracement number.
This is found by W.D.Gann who was a commodity and stock trader who in the 50s made more than $50 million in the trade markets. His fortune found its way from his own methods known as the time/price equivalents. Time/price equivalence is a relationship between time and price movement and it is created for trading instruments. Gann’s methods are not easy to explain. However, he used angles on his charts to forecast the times of future trend changes and also to decide the resistance and support areas.
Elliott wave theory: This theory is based on cyclic wave patterns as well as the Fibonacci number series for market analysis. A perfect Elliott wave pattern displays a 5-wave progress that is followed by a 3-wave decline.
Spaces occur if there is no trading on the bar chart. These spaces are termed as gaps. When on a trading day, the lowest price is larger than the highest high of the last day, then an up gap occurs. A down gap occurs when the highest price of the day is lesser than the minimal price of the last day. Usually an up gap is an indication of market strength, and a down gap is an indication of market weakness. When a price pattern is completed, then a breakaway gap is formed, which is also a price gap. It denotes the start of a price move. A runaway gap is a price gap that takes place just at the middle of a crucial market trend. Due to this reason it is also termed as measuring gap. At the end of a crucial trend and signals, a price gap known as exhaustion gap is formed.
A trend in an indication of the direction in which prices move. An up trend contains increasing peaks and troughs. And, decreasing peaks and troughs display a downtrend that indicate the steepness of the present trend. When a trend line breaks, it is genrally an indication of reversal of a trend. A trading range is featured with peaks and troughs that are horizontal.
In order to level the price information so as to verify support and trends and also resistance levels, dynamic averages are utilized. Additionally, they can also be used in determining a trading strategy, especially in the case of a market that has a strong fluctuating trend or in futures trading.
Common technical tools used are
Coppock Curve: It is an investment instrument utilized in technical analysis to predict lows of the bear market.
DMI (Directional Movement Indicator): It is an important technical indicator used to decide whether a currency pair is trending or not.
In Technical analysis, the analyst is not anxious about any of the elements that affect the market. It only focuses on the actions of that market instrument.
Fundamental analysis is a forecasting method, which forecast the future price movements of monetary instrument. Forecasting done on the basis of financial, political, ecological and other related elements and data that will influence the fundamental supply and demand. But many market traders use technical analysis to decide their trading plan because in technical analysis, skilled analysts can follow many markets and market instruments. It’s an advantage of technical analysis. But in fundamental analysis, fundamentalist wants to identify exact market very closely. Fundamental analysis also focuses on what have to happen in the market. Important factors concerned in price analysis are: Supply and demand, seasonal cycles, and weather and government policy.
In fundamental analysis the fundamentalist studies the cause of the market movement, while in technical analysis technician focus on the result. Fundamental analysis is a macro or planned evaluation of where a currency should be trading based on any criteria. The criteria may be the monetary condition of the country that the currency denotes, financial policy, and other fundamental basics.
Nowadays, many commercial traders made moments either former to or soon after important financial announcements.
For forex trading Forex forecast methods are very important but there are 2 more importan things : good forex broker and nice smart money management.