Dec 2, 2008

ForexGen | Fundamental V.S Technical

ForexGen explains the two basic strategies of investing in the Forex market; one based on technical analysis and one based on an analysis of fundamentals. ForexGen Online Academy divides the study of the market into lobs, leaving nothing questionable.

Forex Technical Analysis

Technical analysis is based on the assumption that future rates of a particular currency or trends in the market can be extracted from analyzing technical charts with various mathematical tools. This method is attractive since all factors that affect prices have already been taken into account and are reflected in the chart’s behavior. The fundamental analysis investor is essentially basing their investments on three fundamental assumptions:

1. The market movements are based on the integration of all factors that affect prices. This includes historical factors and future predictions.

2. The movement of prices directly reflects these past factors and assumptions of future events.

3. History repeats itself.

Someone who uses technical analysis looks at the high/low price of a currency, the price of its opening and closing, and the volume of its transactions. This investor does not overly examine the market. He/She does not invest based on a long-term evaluation of the market, but looks at what has happened to the currency in the recent past expecting that small fluctuations will continue just as they have done before.

Forex Fundamental Analysis

Fundamental analysis takes into consideration the current situation in the country of the currency, including factors such as its internal economy, political situation etc. The economy of a country depends on a number of quantifiable measures such as its central bank rate of interest, the level of unemployment, tax policy, interest rates and inflation. An investor also can add to these quantifiable factors qualitative aspects such as the political situation or governmental stability that will also have an affect on the market. Before investing based on these on these factors alone, it is important to bear in mind the hopes and expectations of market participants. Like any market, the value of a currency is largely based on perceptions and expectations, not only on its reality.

What is the Strategy for Me?

So you ask yourself what is the winning strategy? In reality most small and big investors in
financial markets use a hybrid strategy. Nonetheless, they usually choose one type of analysis as their investing foundation depending on their personal characteristics. For example, if one has more trust in his technical abilities he/she will base their investments on technical analysis. On the other hand, if one prefers to act more on his/her intuition he/she will invest using forex fundamental analysis. However, a good trader will always compare their investing foundation against conclusions extracted by using the second strategy and will only execute trades after examining both analysis types.

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