FUNDAMENTAL ANALYSIS.

Fundamental Analysis is one of the trading methods which we can use to decide whether to place a trade or not.

This method is based on the assumption that the Forex market is predominately influenced by economic news. You know, the announcements made by the big banks, Governments, financial institutions and many other official bodies. Theses announcements indicate the current and/or expected future state of the financial position of the global economy.

 

All aspects of daily life are covered by these announcements from unemployment, interest rates, imports and exports through to consumer spending, house building and the state of manufacturing sector growth. One of the monthly announcements which often has a huge effect on the Forex market is the Non Farm Payroll announcement usually made on the 1st Friday of the month in America.

Not all of these announcements carry the same level of importance, some can be totally disregarded while when others are due you may well be wise to avoid trading until the market has settled down again, especially as a new Forex trader.

Another major factor concerns the country where the announcement is coming from. If it is considered to be positive economic news then that country’s currency may well gain ground against the other currency it is paired with, negative news will obviously have the opposite effect.

You will soon learn which is which as you develop more experience.

 

TECHNICAL ANALYSIS

Technical analysis is the second of the main trading methods used by Forex traders.

In contrast to those who use fundamental analysis, technical traders prefer to work on the basis that the current price already reflects all of the announcements and latest news. As a result of this belief they look for trading opportunities based on past trading activity repeating itself in the future.

To make the charts easier to read technical traders convert each price point into a symbol called a candle or candlestick for reasons which will be obvious once you see them. Each candle represents a period of trading time from minutes to days or even months. Each candle shows 4 elements, the opening, closing, high and low price of that trading period.

Below is an example of a candle or candlestick. It comprises of a body and 2 wicks. If this was in a rising market then the opening price for that time period is reflected by the bottom of the body. The low price is shown at the bottom of the lower wick, the high price by the top of the upper wick and the closing price by the top of the body.

Conversely, if this example was from a falling market the opening price is at the top of the body and the closing price at the bottom of the body. The wicks reflect the same information whichever way the market is trading.

Big-black-candle.svg

Clearly if all of the candles were the same colour it would be impossible to tell which way the market was moving. To get around this we change the colours of the candles. I personally use green for a rising market and red for a falling market. This makes it visually much easier to quickly see what is happening in front of you on the charts.

Once we have our chart in front of us and can clearly see the movement shown by the different colours we can begin to look for trading patterns and opportunities.

To help us with this there are a number of tools which we can use. These include trendlines, simple moving averages and momentum indicators. Don’t worry about these right now, we will cover them in more detail on another day.

It is crucial to make clear here that any lines drawn on the charts are added after the fact. Sometimes it is difficult to believe that this is the case because of the accuracy with which the price points hit the same mark time and time again.

As the price moves up and down, technical analysts draw trendlines on the chart called support and resistance lines. Support lines, as the name would suggest, mark a line where the current price has reached a certain price point and moved away again a couple of times. Traders look for breaks of that line as potential opportunities to place a trade. Resistance lines perform the same function above the price range where the price point has peaked a couple of times and fallen away again.

Once the trading price breaks either a resistance or support line and stays above or below that line then the market is said to have broken through, this is classed as a confirmed break of the pattern and, in most cases would be expected to continue on that path affording the opportunity to make a successful trade.

Trendlines can very often act as both a level of support and a level of resistance as the market progresses through trading time periods. I have added a chart below which I think shows this very well.

 

 

As you can see from the chart above the market moves up and down over a period of time. It is important to make clear once again here that the lines were drawn on after the event, they are added to help identify possible areas of support and resistance.Patterns emerge and the price stalls at seemingly random points and then moves back in the opposite direction. As we study this chart we are able to spot where these price moves peak.

Let’s look at this chart in a bit of detail. The market price reached a price point shown by 1 then met resistance and fell back. It reached this point again at 2┬ámet resistance again then fell back slightly before breaking through and reaching price point 3. Resistance was hit again here and the price fell back again at points 4 and 5. Support was found here where previously 1 and 2 found resistance. The price then rose to pass straight through the previous resistance line where 3 stalled. When the price fell again that previous resistance line at point 3 became a level of support 6. The market bounced up again then fell finding support 7, the same level that interacted at points 1,2,4 and 5. Finally on this example the price rose through the previous resistance/support line used by 3 and 6 before once again finding support on that line 8.

Please do not worry if all of this seems very complicated. We will cover it in far more detail later and once you get an understanding of this method it will become second nature.