Forex Technical Analysis and Fundamental Analysis - 2023
Why do you need to know forex technical analysis and forex fundamental analysis to make better trade? OK, Guys, Forex Technical Analysis, and Fundamental analysis are the essential parts that provide critical insights on current market trends in forex, cryptocurrencies, commodities, and indices. The main purpose of gaining vast knowledge about forex analysis is to study forex price patterns on a particular asset. There are many ways to identify price patterns in the markets like forex technical analysis chart patterns, technical analysis candle patterns, Technical analysis indicators, and more.
Here presented our forex experts about forex technical analysis and forex fundamental analysis picked in-depth insights to inform your trading strategy. If you are searching for best forex brokers, we presented the top 10 recommended forex brokers that might have helped you choose your best.
Understanding Forex Fundamental Analysis
Welcome to our explainer of forex fundamental analysis. Here, you will learn all you need to know about what Forex and stock market traders can gain from this analysis method. We will also get into the nuances of market value and how it is determined when analyzing these factors. The trading platforms you use are only as good as the broker you have, and for that reason, we have forex broker reviews for you to find the best forex broker for you.
In the Forex and stock market, two significant types of analysis are used. These are, technical and fundamental analysis. Where technical analysis advocates for the reliance on price as a reflection of all the variables, fundamental analysis asks you to look at the intrinsic value, held by an investment.
With forex fundamental analysis, you look at everything, except the price. You are encouraged to make rational conclusions about the market value, based on determining the factors that influence it.
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When seeing it this analysis’ methodology for the first time, it can seem and even sound complicated but, there is a lot you can do to make sure that can use the method effectively.
When doing forex fundamental analysis, you focus on the country that carries the currency. It is not the same as studying a company, where balance sheets exist for your benefit. However, there are certainly major factors that you can use as indicators on your trading platforms.
The state of the economy, politics, interest rates, and other types of information, can come together to make this easier for you to do. normally, the factors you look at, are ones that have influence over the country’s monetary policy and are usually reflected in the way the currency evolves.
The Premise of Forex Fundamental analysis
The main premise to keep in mind when talking about forex fundamental analysis is that the value of an asset is not always reflected in the price and by performing this analysis, we can find the accurate market value of an asset and in that way, be able to get the perfect trading opportunities.
So, if an asset’s fair market value is higher than it costs, the asset is undervalued and you need to buy. This is why the fundamental analysis applies to the Forex and stock market.
There are four principals that you need to keep in mind when trying to understand forex fundamental analysis:
- Prices do not fluctuate for no reason. There is always an explanation, even if you may not be able to figure it out right away.
- You can make predictions on how various factors will make the price move.
- The understanding of social, political and economic factors comprehensively, will allow you to predict the movements of price.
- The force majeure events have a major impact on currency but they are sometimes impossible to predict.
Let’s get into what makes up fundamental analysis, in its most undiluted form.
The Factors That Affect The Value of a Currency
In both the Forex and stock market, fundamental analysis is generally perceived as the theoretical type, as it implies that the understanding of underlying factors, lead to accurate estimates of assets’ market value.
Because of the nature of the fundamental analysis, mostly pro traders in the Forex and stock market, are the ones who use it heavily. So, how can you learn what they learn and integrate it into your forex trading platforms for the best results? That is what we are going to tell here. Let’s look at the factors which fundamental analysis is built on.
Through the process of interpreting economic data, fundamental analysis users can predict a country's economic situation and the direction their currency might be taking. The economic data includes the following things:
- Interest rates
- The GDP (Gross Domestic Product)
- Retail sales
- The CPI (Consumer Price Index)
- Industrial production
These are only the main factors and we have not listed them. There’s more. In fundamental analysis, Forex and stock traders tend to keep economic calendars that tell them of important events happening around the world.
By keeping in touch with these events, they can know how a currency's market value will change. Some of the events include things like:
Large corporations and conglomerates that enter into negotiations with a country
Meetings by organizations that influence the currency market. Organizations like G7 heads, Central Banks and heads of state, among others.
Official statements issued by influential figures like the Ministry of Finance, Secretary of Treasury and others.
To summarize on this part, the stronger a country’s economy, the stronger the currency they have. If the economy is regressing or stagnating, this will be reflected in the market value of their currency.
The political climate of a country, has a big influence on the exchange rate. That is the reason why we do forex fundamental analysis, by looking at the following things as well:
- Parliamentary or presidential elections
- Civil and military conflicts
- The interest rates change that happen in the world’s biggest banks
When investors believe that the policies of an elected leader will encourage the economy to grow, the value of the currency will rise. This is also true when the leader is not very good at growing the economy.
When they expect a leader to be the cause of instability, the value of the currency will drop. When Silvio Berlusconi announced that he was going to run for prime minister of Italy again, the market reacted almost immediately and the value of the Euro went down.
Insensitive political climates, the changes become more apparent.
What is Force Majeure
We have mentioned this term at the beginning of the article but what does it mean? These factors do not always disrupt the currency value bit when they do, it is always major. Usually, it is easier to use social circumstances, which are easier to predict.
Social events include things like strikes, coups and revolutions. If you monitor a region closely, you will be able to notice when there is unrest. Natural disasters are a bit more problematic when compared to social change.
Even when the weather forecast gives Forex and stock market traders the kind of information that they need to know when there is a risk of floods, hurricanes, earthquakes and other events, it is not easy to know if they will destabilize the currency or not.
Sometimes, the impact is very heavy. For example, back in march 2011, Japan was hit by a level 9 earthquake which is the largest ever recorded in modern history. It cost the country 5% of their Gross Domestic Product.
As a consequence of this, all the G7 nations had to come together in a coordinated manner, to stabilize the Yen, for the first time since 2000.
The Market Will Always React To News
The other big idea behind this analysis method analysis is that the market will always react to news, breaking the formed patterns. For example, if an influential body or figure in the finance markets comes out with information, the report could be an indicator of a country’s economic health.
Take the employment data, for example. If the report is released, there will be a reaction from the market, based on what it says.
When you rely on forex fundamental analysis, you will always need to use the news to make sure that your strategy is on the right track. The news will not only impact the currency from the country which is the originator of the news but also affect the other currency on the pair.
As much as the news is important for traders, reacting quickly is not always the move you should make when you hear the news. The market value might not shift sometimes. For example, if you watch the news and see some controversial and influential figure giving out news about something, do not rush to change your positions.
Wait a little bit to see the collective reaction. It could be that the piece of news is misunderstood or that there might not be a very adverse reaction to it.
The same is true for reports. It is always good to make sure that the market is moving in a certain direction before you jump on any of the fresh bandwagons that arise when the news comes out about something.
There is a commotion before and after the release of news. It is always up to you to make sure that you do not rush into something that will set you back.
Should You Base Your Trading Strategy on Forex Fundamental Analysis?
Following the economic calendar and watching global events with keenness is something you should definitely do. however, to hinge your entire Forex or stock market career on one analysis type is not something you should do.
All these types of analyses exist so that you can use them and the reason for that is, they all have their merits and none of them are complete on their own. What does that tell you?
As far as we can deduce, it tells us that you need to integrate these analyses and use the best parts of all of them to make a informed and accurate decision. Something you might miss when doing fundamental analysis, could be as clear as day when you are using technical analysis.
The thing is, keeping up with the news, knowing your global events and current events and watching how all of that translates into market sentiment, is something you should not ignore.
If you look at the information and you know what it means, you will not have trouble with making informed decisions about what position to take. When it comes to market value, forex fundamental analysis is the way to go.
You will be able to manage your decisions even better when you combine technical and fundamental analysis, even though they may be on opposing sides about where your attention needs to be.
The Fundamental Analysis Tools Used
When you are using the trading platforms to do fundamental analysis, there are some fundamental tools you will need to incorporate into the process. These are some of the factors you will want to identify and include in your analysis:
EPS- Earnings Per Share
Neither the earnings nor the numbers of shares can tell you much about a company, on their own. When you combine them, you get the ratios to analyze a company well. EPS is net income after dividends, divided by the number of outstanding shares. That gives you the market value for each share of stock.
Price to Earnings Ratio (P/E)
With this ratio, you get a comparison of the current sales price of a company’s stock to the earnings per share.
Projected Earnings Growth (PEG)
The PEG is an anticipation of the one-year earnings, as a result of looking at the growth rate of stock.
Price to Sales Ratio (P/S)
The price-to-sales ratio, values the stock from a company, compared to their revenue. It is also known as the revenue multiple or sales multiple or PSR.
Price to Book Ratio (P/B)
Also known as the price-to-equity ratio, this one is a comparison of a stock’s book value, to the current market value. You can get the answer by dividing the stock’s most recent closing price by the value per share from last quarter’s book.
Dividend Payout Ratio
This is the comparison of dividends paid out to stockholders, to the company’s total revenue. It is an account of the retained earnings (income not paid out, but retained for growth).
This ratio is of yearly dividends compared to the price per share. It is a percentage. To get the value, divide the dividend payments per share in a year by the value of the share.
Return on Equity
With this, you divide the company’s net income by shareholders’ equity to find the return on the equity. It is also known as the returns on net worth, by the company.
In the course of our free forex education and your trading activities, you will encounter price analysis. We call one branch of fundamental analysis. It is important to understand it. You may have heard people say fundamental analysis is not important for day traders.
The reason for this is that they think day traders do quick trades. Most traders believe fundamental analysis in price prediction to be something only long-term traders need to know. However, this is not true.
Day traders and long-term traders both need to pay attention to it. Fundamental analysis in price prediction depends on quantifying current and future factors that impact the economy. This includes:
- Interest rates
- Various economic indicators
These help even short-term traders with decision-making.
There is a lot to learn when it comes to fundamental analysis and you will need to take a lot of time to know the nuances of using this method so that you can apply it properly. In learning this method for application in the Forex or stock market, you will have to go through what it really means to keep up with the forex trading indicators.
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We think that you will benefit a lot from knowing all the available types of analysis and combining their best parts, to give you the edge you need.
With the forex and stock markets, it is all about mastering what is important to make sure that you are always right about the decisions you make, or to minimize risk. In fundamental analysis, you will be covering all the bases that technical analysis tends to ignore.
Understanding Forex Technical Analysis
Welcome to one of the most obvious ways to look at the market. Technical analysis is one of the best types of analysis. With a long historical record of being very dependable, it is something you will need to learn about if you want to understand market trends truly. The financial factors that dictate everything are shown in price charts, on your forex trading platforms. Learn how to leverage this information for your trades. Get the best forex broker from our forex broker reviews today.
With the advent of new charting technology and tools, forex technical analysis has become much more comfortable than it used to be. Technical analysis is the study of price movement in past years and months to spot where patterns appear.
With that information about the market trends, one can be able to determine the future probabilities of how the forthcoming market trends will be like. The financial factors that play into this are all about what has happened before, repeating itself.
We use technical studies, indicators, and analysis tools, to do two things:
- Identify a trend
- Identify the support and resistance through the use of price charts and timeframes.
Forex technical analysis is the framework that allows traders to study price movement and market trends. The theory here is that a person can take a good look at the historical price movements and then be able to determine the current conditions and potential market trends.
The main reason why this idea works is that the prices we see are a reflection of all the current market conditions. If the price reflects all the available information, we can use technical analysis to study price action and in that way, know how to make a good trade.
If you have ever heard of the term 'history tends to repeat itself,' then that is precisely what happens here when we use technical analysis to find out what kind of trades we need to make.
Using the tools trading platforms provide, you can get started on your technical analysis and be making great trades all the time. As you do this, remember to look through our forex broker reviews to find the best forex broker and give yourself a chance to thrive.
A Look at Where Forex Technical analysis Started
In the modern world, technical analysis involves the use of hundreds of tools provided by the forex trading platforms that we use. We consider all the financial factors and use them to make a decision.
With years of research behind them, they are reliable and easy to use. However, it was not always like that. The history of forex technical analysis starts in 1885, when Charles Dow, the founder of the Wall Street Journal, created what we know as the Dow Jones Industrial Index.
In it, he recorded the highs and lows. He linked them to specific events in the markets, while also writing articles about the past market events, with explanations on how they could have been predicted, if someone had been able to see the market trends related to the price.
A man named William Hamilton was the first proponent of what we call the Dow Theory. He used it to measure the suggestions made by Charles Dow. A few other rules were included to forecast bullish and bearish market trends.
William P. Hamilton's Dow Theory was so practical that he was able to give a final warning, three days before the market crashed, back in 1929.
After William, Robert Rhea used the Dow Method to predict the 1932 market crash and even more impressively, the recovery in 1937. He would go on to write a book that forms the basis of technical analysis and study of market trends.
It is titled 'The Dow Theory' which took the works of Charles Dow and made them famous. For every technical analysis fan, this book is the bible.
Understanding the Principles of Forex Technical Analysis
Technical analysis is all about interpreting the historical data patterns from charts to determine the trading opportunities or to avoid a move that could be risky. It is a tool to help you trade by looking at market trends and a crucial part of risk management.
There are three main principles that you will need to learn to understand Forex Technical analysis:
Market Discounts Everything
This principle says that with technical analysis, you only need to focus on the price movements. They are the result of the laws of supply and demand. The asset price included all the information you need about financial factors and other aspects. The data would be:
- Interest rate data
- Market psychology, etc.
The market trends are all in the price, even the factors you do not know about like natural disasters and whatnot, are discounted as a risk.
In simpler words, a trader doesn't need to consider the financial factors individually. We assume that they are already included in the price. This is the kind of laser focus that you can expect to hone when you want to use technical analysis.
Price Moves By Following Market trends
Technical analysis strategies are all built on the idea that the prices do not move erratically. They follow market trends that can be categorized as long-term, short or middle. To understand how these factors into everything better:
Long term trends span over four years. They are either bullish (rising), bearish (falling) or flat (sideways). There is no price movement within this term, which indicates that there is going to be a significant change in prices any time soon.
Mid-term trends can last from 1 week to a month.
In between the periods, we have small fluctuations that happen every day with little impact.
This principle is very similar to the Newtonian first law of motion: an object in their state of motion will remain so unless acted upon by a force that changes the motion.
Forex traders who use technical analysis and, in particular, this principle, can catch market trends very early on, and they ride these market trends to when they start to show signs that they might be reversing.
History Tends To Repeat Itself
When you look at chart patterns, it might be easy to think that human psychology has nothing to do with the results you are looking at. However, technical analysis is based on human psychology. If there is one thing about the human being that is dependable, is that we tend to do the same things over and over again, over time.
Market trends, financial factors and other events force us to acts the same way a century later or a month later. The emotions we have, like fear, panic or excitement, are the definition of market psychology.
Market psychology is what caused market trends to repeat themselves for more than 100 years. Technical analysis maintains relevance, because of this nature of humans.
Despite the changes happening all around us in the climate, politics, economy and society, we stay the same, from a psychological perspective. By looking at historical charts in technical analysis, one can see the patterns.
It is a reflection of who we are, and with it, you can act the right way when you spot certain specific patterns.
Will Technical Analysis Make You a Better Trader?
That depends. The thing right now is that a lot of forex traders are very concerned with risk management. It is easy to feel like the success you make is guided by some kind of luck or expert tips. It might feel like there is no exact way of knowing how the market trends will fluctuate.
The reality is that risk can be significantly reduced by understanding market trends. That is where technical analysis comes in. It encompasses all the financial factors, both perceived and unknowable.
Although mastering discipline in the way you trade may not be enough, each trader has their style, and technical analysis offers you some cool benefits.
- The ability to analyze any of the tradable assets in any markets, using any timeframe.
- The ability to learn how to interpret the charts and be able to spot when there is an upward or downwards trend.
- The ability to see everything all at once, without seeing all the financial factors and whatnot. It is all right there in the price. That is all you need to look at. It is the market trends, summarized.
- The ability to participate in short term trading. If that is something you want to do, you can use the 10- or 20-minute charts to get fast results that help you trade better.
Of course, just like with anything else, practice is a must, if you re to be perfect at technical analysis, following market trends using price only and seeing all financial factors by looking at price alone.
Is Technical analysis Faultless?
We are not saying that the technical analysis system does not have limitations. It has some, and that is why we advise traders who want to use it, to pair it with fundamental analysis. There is always more to be gained when you are using more than one method of analysis.
If you are a beginner, technical analysis can look challenging. It is also hard to grasp that all the financial factors and market trends are reflected in the price charts of technical analysis. However, the math supports this fully.
It is not easy to learn the analysis, but as you very well know, it is not easy to learn anything in the forex market. However, if you grasp the basics, you will start to see the results. It is useful in using the market trends that repeat and the summation of financial factors to give you an excellent forecast of the future direction that the price will take.
Do Not Be Afraid to Learn
We say this because many new traders in the market take one look at the material they need to understand and start wondering if they will ever understand it. Technical analysis is subjective.
When more and more forex traders start to look for certain price levels, and chart patterns, the more likely these patterns will manifest. You could be looking at the same price chart that we are, and we would come up with different ideas on the direction of the price as you.
The important thing you need to know here is that you only need to understand the ideas that underlie technical analysis. As we have told you in the part where we discuss the principles, the information that matters is what underlies the method of analysis.
There is no need to get a nosebleed when someone starts talking about Bollinger Bands, Fibonacci or pivot points.
It is easy to get intimidates by these terms, and that is normal. However, you have probably seen this information in forex education or you will, when you get started. After that, you will be on the same page we are.
We are not necessarily smarter than you; we just took the same course you will or have taken. Now, you need to take all that and put it into practice.
Pick the Best Technical Analysis Software
When you are going to be looking at market trends and financial factors as shown by the technical analysis price charts, you need to be armed with the best software. To give yourself the best chance of landing the best trading platforms, get the best forex broker from our forex broker reviews.
These are some of the best technical analysis software out there:
- MetaTrader 4
- MetaTrader 5
- MetaTrader Web Trader
Opening a demo account will give you access to the software, and you can train yourself on the proper way to use it for your trading activities. The broker and software are just as important as what you learn.
With this software, you will have the bare essentials. With time, you can learn how to use plugins and other indicators to streamline further.
We live in a time where the traders can receive real-time market updates, using push notifications and have access to so much information that can sway them. You will find yourself in a position where a viral tweet confuses you entirely that you are unable to make a trade that would otherwise be easy.
Technical analysis is a great way to cut through all that and be able to see everything more clearly. You can become a controlled trader who knows that the market trends and financial factors are all reflected in the charts you have.
With that in mind, you can make a decision based on historic data and not rumors or hype. When you compare technical analysis to fundamental analysis, it is more affordable with companies providing trading platforms with free charting software.
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When doing technical price analysis, we rely on past price movement data to do price prediction on future values. The top 10 forex brokers provide you with charts. On the charts, we focus on movement and analytical tools to test currency pairs for weaknesses and strengths.
Technical analysis examines specific currency pairs over longer periods of time. Patterns may repeat themselves and from them, price prediction is possible.
Using computer software, price analysis gives accurate numbers of price movements. In technical analysis, we dive deep into the math of everything and ensure that nothing gets overlooked or left to chance. Computer software is now sophisticated enough to do everything.
Your broker should provide you with important price analyses and predictions for a better trade decision.
Understanding Sentiment Analysis
In this forex analysis section, the factors that influence it are how many people are buying or selling a certain currency. It also incorporates their thoughts about which direction the currency could head toward.
This is where we apply 'crowd psychology'. When traders use sentiment analysis, they look for large investment amounts in a specific currency, headed in one direction.
So, if many people are buying a certain currency, the future number of sellers increases, and the number of buyers goes down. This means that there could be price reversal because all the buyers will need to sell.
Find out more about price prediction and analysis by looking at the charts provided.
One thing might remember, there is no magical combination of technical forex indicators in the forex market that would auto-unlock some secret forex trading strategy. If you want to make better trade, you might need vast study and research about forex technical analysis. Someone says, “Forex Technical analysis and Forex Fundamental Analysis are the backbones to achieve success.”
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If you have any questions or need any help, you can tell us in the comments box. Our Forex Experts are always ready to solve your problems with proper guidelines.
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