If you are a new foreign exchange (Forex) trader, Forex technical analysis can sound like rocket science. You may even mistake it for fundamental analysis. Though both will require critical thinking, obviously, they are at the opposite end of each other in terms of the subjective-objective spectrum. Understanding how Forex works and how the two types of analysis can be done will help you better succeed in trading foreign currencies.
What is Forex?
As with any investment, you have to know what commodity or security you are dealing with. In this case, you are dealing with foreign currencies that you can buy or sell to make a profit based on their changing values. The truth is that trading foreign currencies can be very risky. This is because they can change their values drastically in a short period of time. But if you're smart enough to analyze the trends, you can make a big profit out of this.
Fundamental analysis in foreign exchange
Because the risk is great when dealing with foreign exchange, it is important to have some sort of prediction technique. In which case, different forms of analysis can help you predict how a currency will fare. Fundamental analysis, for instance, makes use of politics, economy, and sudden events, then rolls these factors together to make up the general situation. The trader looks at the general situation and makes a prediction as to how that situation will affect the currency. For example, when a nation loses its leader, the currency of that nation may suddenly decrease in value.
Technical analysis in foreign exchange
Forex technical analysis does not deal with situations, but with raw, unemotional data. Instead of reading the news, the trader takes a look at the recent history of the foreign currency's values. The trader may even look at months' worth of currency value if he or she wishes to see the bigger picture. Then, he or she will plot charts based on the data to make the progression or trending easier to read. Through the use of indicators such as moving averages and Bollinger bands, the trader will discern a pattern or trend. He or she may also recognize when a currency is experiencing a deadlock. A deadlock or being in a state of congestion means that the currency is locked within a small range of values. This may mean that the currency is low-risk or not much can be earned through trading that value.
The benefits of Forex technical analysis
For some pros, Forex technical analysis can be self-sufficient when making predictions and following trends. Through Forex technical analysis, you do not need to become an economist or a political analyst, you just have to be a Forex trader who can plot and read graphs. Through the graphs, you can already figure out what is likely to happen tomorrow or the following week. However, you should operate with the knowledge that even Forex technical analysis can be fallible. But at least, it can give you a better footing when dealing with a high-risk security, such as a currency, which is better than fumbling for your next trading move.