There is a vast range of tools and methods to trade in the forex market and somewhat it is intimidating for the new traders.
Most of the methods can be divided into either technical analysis or fundamental analysis. Nowadays many traders focus on technical analysis while others also use both the methods in forex trading.
Fundamental analysis versus technical analysis
The focus of fundamental analysis is on the economic news and data like interest rate, employment report, core inflation, etc. The major purpose of the fundamental analysis is to compute the intrinsic value of the individual asset.
In the case of technical analysis, intrinsic value is not important. Technical analysis is referred to the study of historical prices to identify patterns and assess probabilities of future movement in the forex market by the use of technical indicators, studies, and other tools.
Technical analysis concentrates on two things; identifying the trend and identifying the resistance or support with the use of different timeframes and price charts. Markets can move up, down, or sideways. Prices mainly move in a zigzag pattern; range – when prices zigzag sideways and trend – prices move zigzag higher or lower (the upward trend is a bullish trend and downward trend is a bearish trend).
Importance of technical analysis in the forex
Precise decision making
Technical analysis helps a trader to not only decide where and when to enter the market and also helps where and when to exit from the market. Some indicators and systems claim to work 100% but technical analysis is more important in the simple fact that many traders study it and they also believe it works more than any other approach.
Technical analysis measures where demand and supply meet or we can say that where there is gap between demand and supply.
A second reason for the popularity of the technical analysis is that it helps the traders to decrease the desire to trade built on intuitive reaction, which is a common way through which many traders lose money in the forex market, and it is a bad trading habit that is difficult to break unless there is an alternative solution to it.
Technical analysis includes diverse kinds of indicators. Some measure the movement, while others measure the strength of the trend as associated with the present move. The field of technical analysis is a very extensive and its use varies from trader to trader, but the truth is that many large firms employ technical analysts to help them with their trading strategies.
Technical analysis is simply a tool
Technical analysis is a better way to predict the trends and look at the markets, but it is not the only form of analysis rather simply a tool. Most traders also use fundamental analysis or news analysis to catch the best cfds trading opportunities.
All forex trading tools and analysis strategies are useless until traders put their effort to obtain discipline and patience throughout their trading career.