Forex traders use two basic processes to forecast the forex market: technical analysis and fundamental analysis. While both these predict price or movement, fundamental analysis forecasts the market using external factors, such as government involvement, political moves and social movements. Technical analysis, on the other hand, analyzes past market action to predict the future of the market. Also, technical analysis involves studying the effect, and fundamental analysis involves studying the cause of market movement.
Fundamental analysts study any change in the foreign exchange rate, caused by government, leadership or economic changes, to forecast the market’s future. Hence, it is important for trader to have in-depth knowledge about countries whose currencies they deal in, to forecast forex trends correctly. Several traders also utilize a blend of the two processes to predict forex market trends.
More on Technical Analysis
Technical analysis involves studying charts of the past market to predict trends and price movements. It relies on what has already happened in the market, rather than what should happen. With technical analysis, analysts can follow several market instruments and markets at the same time. Technical analysis is based on the following principles: market action is supreme, price movement shows trends and history is repeated.
Besides, the technical analysis theory is also divided into categories, some of which are:
Gaps: Gaps are the space created when no trading takes place. Here are the different types of gaps: up gaps result when a day’s lowest price is higher than the highest high of the previous day; it is significant of market strength. A down gap is indicative of market weakness and results when a day’s highest price is lower than the previous day’s lowest price. Runaway gap occurs near the midpoint of a key market trend and is also called measuring gap.
Indicators: Indicators include stochastic oscillator and relative strength index (RSI). RSI calculates the ratio of up-moves to down moves and is expressed in the 0-100 range. An RSI of 70 or more indicates that the instrument is overbought, while an RSI of 30 or less indicates the instrument is oversold. Stochastic oscillator, on the other hand, indicates oversold / overbought conditions on a scale of 0-100%. During strong up trends, closing prices concentrate in the higher part of the range, while during down trends, closing prices concentrate in the extreme low.
Trends: The direction of prices is called trends. While falling peaks and troughs comprise a downtrend, rising peaks comprise an uptrend.
Technical analysis, unlike fundamental analysis, also concentrates on the activity of an instrument’s market.
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