Market Analysis & Trading Psychology

MARKET ANALYSIS

There are two basic approaches to analyzing the forex market, fundamental
analysis and technical analysis. Fundamental analysts concentrate on the
underlying causes of price movements, while the technical analysts study the
price movements.
Technical Analysis
Technical analysis is used to attempt predicting future price movements based
on past time framed analysis and the reading/understanding of graphics. Within
technical analysis, various thought patterns exist, nevertheless all are based on
past historical data.
Fundamental Analysis
Fundamental analysis incorporates factors such as wars, discoveries and
changes in government policies which influence demand and supply and
consequently market prices.
Fundamental analysis comprises the examination of macroeconomic indicators,
asset markets and political considerations when evaluating a nation’s currency
in terms of another. Macroeconomics indicators include growth rate figures, as
measured by Gross Domestic Product (GDP), Interest rate, inflation,
unemployment, Money supply, foreign exchange reserves and productivity.
Asset markets comprise stock, bond and real estate. Political consideration
impacts the level of confidence in a nation’s government, the climate of
stability and level of certainty.
Sometimes government stand in the way of market forces impacting their
currency and hence, intervene to keep currency from deviating markedly from
undesired levels.
Currency interventions are conducted by central banks and usually have a
notable, albeit a temporary impact on FX Markets. A central bank can
undertake unilateral purchases/sales of its currency against another currency;
or engage in concerted interventions in which it collaborates with other central
banks for a much more pronounce effect. Alternatively some countries could
move their currency merely by hinting, or threatening to intervene.
Technical Analysis or Fundamental Analysis?
One of the dominant debates in financial market analysis is the relative validity
of the two major tiers of analysis: Technical and Fundamental, in forex, several
studies concluded that fundamental analysis was more effective in predicting
trends for the long term (longer than 1 year), while technical analysis was more
appropriate for shorter time horizons (0 – 90 days). Combining both approaches
was suggested to be best suited for periods between 3 months and year.
Nonetheless further empirical evidence reveals that technical analysis of long-term trends help identify longer-term technical “waves”, and that fundamental
factors do trigger short-term developments.
Most traders abide by technical analysis because it does not require hours of
study. Technical analyst can follow many currencies at one time. Fundamental
analyst, however tend to specialize due to the overwhelming amount of data in
the market. Technical analysis works well because the currency market tends
to develop strong trends. Once technical analysis is mastered it can be applied
with equal ease to any time frame or currency traded.