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The Different Types of Analysis of a Forex Trade
There are three basic types of analysis of a forex trade. The first is technical, which involves analyzing trends on the forex market. Technical analysis is often used by forex traders to assess the potential of a trade. Technical analysis involves comparing the data provided by different tools to the actual trade. This type of analysis helps traders avoid taking on too much risk with a single trade. However, it is not recommended to take on more than two to three trades a day.
Fundamental analysis focuses on the fundamentals of a currency. Fundamental analysis looks at the economic status of a country. The analysts study factors such as the trade balance, the growth of jobs and GDP, as well as the central bank's benchmark interest rate. The analysts also study individual companies' financial power. The same applies to their instruments and other liabilities. Traders should use both types of analysis to make decisions about their positions.
Technical analysis can be complex. Inexperienced traders may find it overwhelming to make decisions based on technical indicators. This is why most people start by simplifying their analysis. The key is to understand the basic concepts of Forex technical analysis, which include trend indicators, momentum indicators, oscillators, and breakout indicators. Ideally, a good strategy will be able to operate with just two or three major indicators. Using too many tools, however, can lead to over-optimization and risking your profits.
Technical analysis uses charts to analyze price patterns. The price action of currency pairs reveals patterns and trends. Past performance is no guarantee of future success. However, the relative stability of major currencies makes patterns predictable. In this case, you can use technical analysis to determine whether the currency pair you're interested in is going to move up or down in the future. The most common example of this is a bearish "head and shoulders" pattern with 13 candlesticks. This means that there is likely to be a downward price movement.
A forex trader must also be aware of the currency's fundamentals. Currency's interest rate is the primary issue that affects forex trading. Other fundamental factors include inflation, gross domestic product, manufacturing, and economic growth activity. Interest rates tend to move higher in countries with stable economies. This is why the Canadian dollar tends to move up and down with oil prices. However, despite these factors, forex traders should not overlook fundamental factors unless they feel they have no other basis for forex online trading.
A forex trader should consider the retracement levels of important indexes in addition to the overall price of the currency. These indexes can help traders understand how the movements of one market affect the other. For example, in 2009, gold surged to record highs. This move could have been caused by the perception of paper money decreasing rapidly. Cheap dollars also helped the commodities market go up. So, while it is important to understand market dynamics, don't get swept away by rumors.
