Technical analysis and fundamental analysis are two of the oft-used strategies in the forex market. Technical analysis is by far the most common strategy used by individual forex traders, which we’ll explain in further detail below.
Fundamental Analysis
If you think it’s difficult to value one company, try valuing a whole country! Fundamental analysis in the forex market is very complex, and is often used only to predict long-term trends. However, some traders do trade short term strictly on news releases. There are many fundamental indicators of currency values released at many different times such as:
Non-farm Payrolls
Purchasing Managers Index (PMI)
Consumer Price Index (CPI)
Retail Sales
Durable Good
These reports are not the only fundamental factors to watch. There are also several meetings where quotes and commentary can affect markets just as much as any report. These meetings are often called to discuss interest rates, inflation, and other issues that affect currency valuations. Even changes in wording when addressing certain issues — the Federal Reserve chairman’s comments on interest rates, for example — can cause market volatility. Therefore, two important meetings for forex traders to watch are the Federal Open Market Committee and Humphrey Hawkins Hearings.
Simply reading the reports and examining the commentary can help forex fundamental analysts gain a better understanding of long-term market trends and allow short-term traders to profit from extraordinary events. If you choose to follow a fundamental strategy, be sure to keep an economic calendar handy at all times so you know when these reports are released. Your broker may also provide real-time access to this type of information.
Technical Analysis
Technical analysts of the forex analyze price trends, similar to their counterparts in the equity markets. The only key difference between technical analysis in forex and technical analysis in equities is the timeframe, as forex markets are open 24 hours a day. As a result, some forms of technical analysis that factor in time must be modified to factor in the 24-hour forex market. These are some of the most common forms of technical analysis used in forex:
The Elliott Waves
Fibonacci Studies
Parabolic SAR
Pivot points
Many technical analysts combine these studies to make more accurate predictions (i.e., the common practice of combining the Fibonacci studies with Elliott Waves). Others create trading systems to repeatedly locate similar buying and selling conditions.
