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Every trader approaches the market differently. It is how you derive data about market conditions that help you decide your trading style. The types of approach are technical and fundamental or can be a combination of the two. We go a bit more in detail from here.
Technical Analysis
The practice of predicting currency prices by examining trading patterns and comparing the shape of current charts to those from the past.
Technical analysts use a variety of complex charting techniques, but some of the most basic involve plotting price movements of a currency over time on a chart. The shape of the chart is supposed to reveal something about whether the currency is headed up or down. A head and shoulders pattern, for instance, could imply a currency has topped out. Technicians look for currencies that have broken through their resistance level (on the upside). A currency that has broken through its support level (on the downside) is considered poised for further downward movement.
Advocates insist that the currency market clearly moves in a trend, and that careful charting and knowledge of history can recognize these. Whether or not technical analysis has any validity, it does provide good indicators of market movement, and on that basis alone influences currency prices.
Fundamental Analysis
An approach where an investor determines the price movement by studying a currency’s history, evaluating economic conditions such as growth and interest rates, inflation, supply and demand, politics and other factors that will affect its strength and value in comparison to another currency. This approach sets fundamental analysts apart from technical analysts, who study previous trading patterns to forecast which direction (up or down) a currency or the market itself will head in the future.
Technical Analysis or Fundamental Analysis?
All traders utilize a combination of both techniques to analyze price movements; technical analysis to determine immediate short-term trends and fundamental analysis to derive data about market volatility. Technical analysts will follow many currencies at one time while fundamental analysts specialize in market data of a particular currency. Technical analysis works well in strong trending markets like that of FOREX, and fundamental analysis serves as good indicators for current trend duration. Once both technical and fundamental analyses are mastered, they can be applied with equal ease at any time frame or currency traded.
