Forex day traders use foreign exchange analysis to decide when to buy or sell a currency pair. This analysis type can be technical, utilizing charting tools, or fundamental, using news and economic data. A trader’s system uses analysis to generate buy/sell signals when indicators align. Forex trading strategies using this analysis type are often available for free, at a cost, or created by the trader.
Fundamental Analysis type
Analysis type called fundamental, monitors economic indicators like unemployment, interest rates, and GDP to understand forex changes. For instance, someone analyzing USD/EUR looks at interest rates of the U.S. versus the Eurozone. They will also watch for significant news releases affecting each economy. The concept behind fundamental analysis is: strong economic prospects strengthen a currency. Foreign investment and business, attracted by strong economies, increases currency demand. This increased demand reduces supply and drives up currency values.
Technical Analysis type
Technical analysis type assesses assets via market activity data such as past prices and volume. Instead of measuring an asset’s value, technical analysis identifies patterns in charts to predict future activity. Many different forms exist for technical investors, mirroring fundamental strategies. Some use indicators and oscillators; others focus on chart patterns, many combine the two. Technical analysts only use historical price and volume data, unlike fundamental analysts. They don’t care if an asset is undervalued; historical data and its predictions matter. For example, a trader technically analyzing EUR/USD uses past price action and trading volume.
Which Is Better?
Automated and manual trading strategies can be easily found online. Importantly, no perfect trading system exists. A flawless system wouldn’t be sold; major financial firms protect their strategies. No “best” type of analysis exists; the ideal method depends on a trader’s time frame and information access. A short-term trader may favor technical analysis with limited economic data but fast price quotes. Long-term traders might prefer fundamental analysis, with access to economic data. Forex traders should experiment with all analysis methods to find what works best.
Want to trade forex? Here’s a list of forex brokers to check out plus analysis and predictions for major currencies.
