There are two kinds of Forex investment strategies which are technical and fundamental analysis. Let us examine their differences, pros and cons that may determine your success in Forex trading.
1. Technical Analysis
Technical analysis is mostly undertaken by small and medium size investors.
There are factors to consider as in quoted trading prices. Price reflects all actual market movements. That means it includes everything known to the market like supply and demand of foreign exchange, political factors, trade agreements etc.
It is not concerned with what resulted in change rather deals with actual changes. It works on the assumption that price can take only one of the three directions:upward, downward and sideward. It rests on those market patterns that have been identified as significant.
That means those factors which are repetitive in nature or will produce desired results. History always repeats itself as human psychology changes very slowly with time.
As a result, market movements are predictable.
Various technical indiciators are:
A. Relative Strength Index
It takes into account the ratio of upward and downward movements in index and expresses it in the range of zero to hundred.
Charts include various hills, slopes, curves that develop on a chart over a time and reflect some major and minor changes in pattern. Some of the chart formations include triangle, rectangle, head and shoulders, double top and bottom and saucers.
A gap represents area on a bar chart where no trading took place.
It is formed when the lowest price on a particular day is more than the highest price of previous day.
It is formed when highest price of a certain day is less than the lowest price on previous day.
Various number theories are used in technical analysis like Fibonacci theory.
F. Gannstochastic Oscillator
This indicates the overbought and undersold condition.
It uses a scale of zero to hundred percent.
2. Fundamental Analysis
It is the one where current economic, political, financial situation of the country of currency is studied.
A country’s economical and political condition depends upon many factors like the interest rate, unemployment level, exports and imports, per capita income, percentage of population living above and below the poverty line, inflation, trade relations with other countries, tax policies etc.
A fundamental analyst studies and evaluates all these factors before coming to any decision. Thus it helps in long tem decision making and making profits in short term by extra ordinary developments.
Some of the indicators that help in fundamental analysis include:
A. Gross Domestic Product
It reflects total market value of all the goods and services produced in a country during a given year.
B. Retail Sales
This reflects total receipts by all the retail stores in a country.
C. Consumer Price Index
It reflects change in prices of consumer goods.
D. Business Cycle
It reflects various phases through which a business passes.
These phases include depression, expansion, peak and recession
E. Monetary Policy
It controls the supply of money in an economy.
Trading successfully needs knowledge, time and understanding of a market.
You cannot earn continuously in a Forex market due to its volatile nature. Thus as a trader you should try to consider both technical and fundamental strategies of forex trading and make decision based on market expectations and trends.
Try trading with money that you can afford to loose without any regrets.
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