Last Updated: January 20, 2022
Forex is a big international market in which currencies are bought and sold around the world for many things. One of them is to trade in the Forex market and gain profit from it. For instance, Ms. Julia trades in EUR/USD pairs frequently; from her analysis, the pair would go up and so therefore Ms. Julia opened a buy position. After several hours passed, her analysis hit bullseyes and boom! The price of EUR/USD has gone up and then she took profit from it.
From the example above Ms. Julia has analyzed EUR/USD and her analysis was right, but how could she be able to analyze the Forex market? Well, based on my experience and knowledge, there are two types of analysis that you could use to trade in the Forex market. Those are Technical Analysis and Fundamental Analysis which I covered below this paragraph.
Technical Analysis
This type of analysis is my favorite type because you could only see a specific chart of a currency and it shows all of what has happened in the market. So basically, Technical Analysis is connected to how the price of a currency has moved on the chart that we see in which it formed data and that data could be used to analyze the market.
To have a better understanding regarding this, let me explain it from the book that I read. According to Dicks (2010, p. 149), Technical Analysis was from Charles H. Dow that focused on the behavior of investors, psychology, and price movement. This means that this type of analysis requires you to analyze the crowd behavior which would lead the market.
Fundamental Analysis
Now, this type of analysis is a bit more complex than the previous one because you have to understand economic, at least, the impact of economic events that would change the course of the Forex market, such as news, global events that take place in the world, other macro and micro-economics.
Dicks (2010, p. 123) said that Fundamental Analysis is usually centered on financial and economic data and also could be influenced by politics. This means Fundamental Analysis requires you to analyze global economics in pairs that you choose to trade. Well, this type of analysis reminded me of when I was a college student of International Relations, in which I learned about the interaction of economics and politics that could affect each other. To have a clear understanding of this, let me give you an example below.
Let us say that Mr. Bondan wants to trade EUR/USD, and he just read the economic news from the internet, saying that the United States wants to release its balance of trade and the forecast of what Mr. Bondan read from the internet is minus, and then what he would do is to open a sell position on EUR/USD pair. After the balance of trade is released, the forecast from the internet turns out to be true and Mr. Bondan's position on EUR/USD is right. Several days passed, Mr. Bondan had a smile on his face because he had taken a profit from EUR/USD.
Conclusion
Whether you are inclined to Technical Analysis or Fundamental Analysis or you use them both to analyze the Forex market, just remember that no matter how much time you spend analyzing the market, there will always be a time when you are wrong and it is completely normal in trading. That is why setting a stop loss is pivotal when it comes to trading.
Written by Andre I.
Reference
Dicks, James. 2010. Forex Trading Secrets: Trading Strategies for the Forex Market. New York: McGraw Hill.