If you want to achieve success in the foreign exchange market it is important that you are able to understand fundamental and technical analysis. The forex market is volatile and if you want to earn regular returns on your investments you need to know the best entry and exit points. This can enable you to minimise your risks and maximise your profits easily.
Traders can incorporate both fundamental and technical analysis when trading in the forex market so that they are able to determine the future direction of the market and make consistent profits. It is best to trade in the direction of the trend so that you are able to improve your performance in the forex market.
Fundamental and technical analysis in the foreign exchange market
The key assumptions on which technical analysis is applied to the foreign exchange market is that traders believe that fundamental factors like inflation, GDP (gross domestic product), unemployment and interest rate are already factored in the price. It is assumed that the price patterns tend to repeat themselves and looking at the past prices you may be able to predict the future trend.
The assumption in fundamental analysis is that by studying the economic indicators and government policies you may be able to predict the future price movements and trends. Technical analysis can be used to predict the future price change and identify the entry and exit points. You can also make use of this analysis to add or reduce existing positions. You may be able to predict the direction of the currency pairs using fundamental analysis and this can help you plan your trading in an effective manner.
The tools that are used in technical analysis include indicators, oscillators, charting trends and ranges with chart patterns and trend lines. Similarly, the tools that you can use in fundamental analysis include economic reports and indicators, economic news published by government agencies and economic calendar events.
Key indicators used for technical analysis include Bollinger bands, moving average, moving average convergence divergence (MACD), candlestick chart patterns and Fibonacci retracements levels. Similarly, the indicators used in fundamental analysis include GDP, trade balance, interest and inflation rates and unemployment rates. You can make use of multiple indicators for the analysis so that you are able to get a correct picture of the market conditions.
Tips to use fundamental and technical analysis in the foreign exchange market
Traders can choose to use fundamental or technical analysis for deciding the best time to trade. You can combine both fundamental and technical analysis to identify the prevailing market conditions. If you try to trade without understanding the market conditions you may not be able to achieve the desired success. You can make use of the analysis to determine support and resistance levels. This can help you understand how the market may move in the future and you may make the decision of buying and selling in the forex market. When you become aware of the trend in the foreign exchange market you may be able to make consistent profits.
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