Many principles that guide us through life can also be applied to succeeding in online Forex trading. To just give a few examples of such principles, modesty (overconfidence in trading is a very dangerous thing), objectivity (it is important to trade with no emotion involved), maturity (the ability to know when to stop), integrity (sticking to your strategy, even when it is challenging), and many others.
One of those principles is moderation. Just as in life too much of anything is never good; the same can be said about the Forex market.This can be understood in many different realms of Forex trading (leverage levels, size of positions, etc.), but I would like to focus on one specifically. The way in which traders analyze the market should not, contrary to what many experts will claim, be based on technical or fundamental analysis exclusively. Like we just said, too much of anything is never good. It is really best to make use of both types of analysis if you want to really succeed in the Forex market.
Let’s back up and explain the terms first:
Fundamental analysis is exactly how it sounds; it focuses on the fundamentals. It basically stems from the assumption that foreign currency does not work in a vacuum. The USD will not increase without some sort of an incentive, or a driving force. That force is, according to the believers in fundamental analysis, the country’s overall economy. If the U.S’s economy, for example, is thriving, the demand for the USD will increase, which of course will lead to an increase in the value of the USD.
I guess one can say that fundamental analysis focuses on the “big picture”. How is the country’s economy doing? But fundamental analysis does not only focus on dollars and cents. Many factors are considered by this type of market analysis. Some include politics, economic strength, speculation, economic projections, inflation rates, capital movement, interest rates, as well as quotas and tariffs.
Technical analysis is a totally different story. The phrase that best describes this type of analysis is of course “The trend is your friend”. Technical analysis is conducted by viewing the Forex charts of a certain currency and working on the assumption that the trend will not reverse itself randomly. So, if you see a certain trend in the market, technical analysis will tell you to go with that trend. The reason for this is that you are much more likely to make money when you can find a trend and trade in the same direction. Technical analysis helps traders identify these trends in their earliest stages and thereby provides the trader with very profitable trading opportunities.
Now that we grasp the different schools of thought when it comes to Forex market analysis, it is important to understand that if you do not act in moderation when choosing your type of analysis, you might end up with some serious losses on your hands. What better way to emphasize this crucial point than an example?
If you are a believer in technical analysis, for example, and the USD has been on a consistent rise over the last few days, weeks, or months, chances are you will decide to purchase a large amount of USDs. If however, you completely, choose to ignore fundamental analysis, and on the day of your trade, there is a huge terrorist attack on the U.S, or alternatively, the USD interest rate was just decreased significantly, you might be very surprised to find that your “friend”, the current trend, has just left you and is now running in the other direction.
To summarize, if you want to be a successful Forex trader, you need to be open and aware of both types of market analysis. One, however, could make the claim that if you are more of a long term trader, and you want to know what the market will do in a few months time, fundamental analysis can give you a good indication. Technical analysis, on the other hand, might assist traders in making a short term decision whether to open a certain position right now. Whether or not you agree with that assessment, there is no doubt that neither fundamental nor technical analysis can be completely neglected when trading on the Forex market.