Technical analysis is based on price action. The idea behind it is that the market will tend to repeat what happened in the past. In other words, traders use market history to make predictions as to what it will do next.
There are various reasons as to why certain price levels become significant and technical traders use charts in order to find these levels. This means that they are able to visually see levels of support and resistance in price as well as identify particular chart patterns which may indicate which way the price will move.
The chart above shows how support and resistance areas are effective in determining price action. It is important however to understand that these levels can be broken and their roles can be reversed where support becomes resistance and vice versa.
There are also many other tools and indicators which technical traders use, such as Fibonacci, Stochastic Oscillators, Moving Averages, etc.
We know that this may sound like “Greek” to you and may be quite daunting but that is what we are here for. We will assist you in mastering the art of trading the financial markets.Fundamental Analysis
Fundamental analysis is used in order to determine what the supply and demand of a particular asset is. When it comes to trading Forex, the supply and demand of currencies will determine what their respective exchange rates are.
Of course this is easier said than done and there are a number of factors that fundamental analysts will take into account when determining the supply and demand of a currency. They will look at political, social and economic factors that may have an effect on a country. Acts of war and other unforeseen events can also have huge effect on the market.
A good example of this is the recent “Brexit” that took place. This is where Britain voted to leave the European Union. A quick look at the chart below will show you that this was seen as a negative move for their economy and it had a devastating effect on the value of their currency.
Britain’s decision to leave the European Union saw the GBP (Great Britain Pound) lose more than 10% against the USD (United States Dollar) in a very short space of time! This was very bad for the GBP but can you see that if you had bought USD vs the GBP, you may have been able to buy a yacht and retire in the Bahamas!
The logic behind fundamental analysis is quite simple really and makes allot of sense. The very basis of it focuses on whether or not the economy of a particular country is in good shape or whether things aren’t going exactly according to plan for them.
Where the economy of a country is positive, generally you will see more investment in that country and ultimately their currency should strengthen.