In order to be able to make our decisions about the direction that the price of a certain pair of Forex currencies will take in which we want to invest we can mainly use 2 types of analysis that we will discuss below:
Types of Analysis
There are two types of analysis you can use to trade in Forex:
- Fundamental analysis
- Technical analysis
There has always been a debate about which of these two types of analysis is best, but to tell you the truth, it is necessary to know a little about both.
The greater the one we could consider as a third type of analysis: the relational analysis that is a special case of the fundamental analysis focused on real time and in understanding the correlation that the trends of currencies have with each other and with other markets, including commodities (gold, oil, etc.).
Fundamental analysis is a way of looking at the market from an economic, social and political point of view that affects resources and demand. In other words, with the fundamental analysis you observe which economy is going Wind in Stern and which is, on the contrary, going through a bad streak.
Fundamental Analysis monitors the health of the economies of the countries and their influence on the price of the currency
The idea behind this type of analysis is that if a country’s economy is well and stable, its currency will also go well. This is because the better a country’s economy is, the more confidence other countries will have in their currency.
For example, the US dollar (USD) has been losing strength because the US economy is weakening. As the economy worsens, the value of the dollar will continue to decline.
Later in this Forex course, we will teach you the most important specific events that handle currency price movements, for now, the important thing is to know that the fundamental analysis is the way to analyze a currency according to the strength of the economy of the corresponding country.
The technical analysis is the study of the movement that follows the price. In a word, we could say that the technical analysis is the graphics. The idea is that each trader can observe the history of price movements, and, on this basis, can determine, at a certain level, where the price will go in the future.
Looking at the graphics, you can identify trends and patterns that can help you find good opportunities to operate.
The most important thing to learn from technical analysis is to identify the market trend. Many people claim that “the trend is your friend”. The reason for this is that it is much more likely to earn money when you can find a tendency and operate in the direction of it.
Technical analysis can help to find this trend in its primary stages and thus provide good opportunities to open operations.
So what kind of analysis is best in Forex?
This is the million dollar question!! As you advance your journey through the exciting Forex market world, you will find strong trends towards technical analysis or fundamental Analysis.
You will find people who say that only fundamentalism matters in the market and that any pattern found in the graph is mere coincidence. On the other hand, you will find people who claim that it is the technical analysis to which attention must be paid.
Don’t be fooled by these extremist people. No kind of analysis is actually better than the other one! To become a Forex expert, you will need to know how to effectively use both types of analysis.