Best Method of Analysis for Forex Trading
Retail traders trading in forex use forex analysis to decide the best time to sell or buy. There are two primary methods of analysis that are used to make these decisions- technical analysis and fundamental analysis.
There is also a third method of analysis called weekend analysis. This tool assists traders in planning for the coming week and establish the approach they will use to trade with throughout the week. This article will look at the three analysis methods to help you choose which way is the most appropriate for you to use.
Technical analysis involves using technical indicators and charts to predict prices and know when to join or exit a trade. It comes from both automated and manual systems. The manual system involves the analysis of technical indicators and the interpretation of the data collected to make a selling or buying decision.
The automated system involves teaching the trading software on the signals to look for in charts, interpret the signals and make a buying or selling decision on behalf of the trader. Although an automated analysis system could have an advantage over the manual counterpart, it uses behavioral economics to make trading decisions. This could at times be incorrect and could lead to massive losses because the forex market is volatile and spontaneous.
Fundamental analysis uses news-based events or economic indicators to analyze changes in the forex market and make trading decisions. Traders do this by monitoring figures like unemployment, interest rates, gross domestic product (GDP), and other types of economic data collected from the country’s economy.
For instance, if you are analyzing the USD/EUR pair using the fundamental analysis approach, you would find data on the interest rates in Europe to be more valuable than in the US. It would be in your interest to be versed with all events and news associated with the Eurozone to gauge their relation with the price of currencies.
There are two reasons why traders engage in weekend analysis. Firstly, they want to establish a view of a particular market of interest to them. Surveying the market landscape over the weekend gives them an upper hand when reacting to situations in real-time during the week.
The weekend analysis also assists traders in setting up a trading plan for the following week and decide on the strategies to use. This blueprint ensures a smooth and precise analysis during the week.
Choosing the Best Analysis Method for Forex trading.
You need to think carefully about the strategies and tools to use before engaging in a trade. Here are a few things you need to consider when choosing the best analysis method.
Chart Important Indexes
You must chart indexes for the market you are trading in for a longer time frame. Charting indexes help you to determine the relationship between markets. It also allows you to tell whether the movement in one market is in concert or inverse with the other market due to factors like speculation.
Understand the Drivers
Trading is an art, and you need to know which trading tool to use to realize your goals. Besides that, you also need to understand the relationship between markets and factors that could change the existence of these relationships. In this situation, the combined use of fundamental and technical analysis is beneficial.
Time the Trades
As a trader, you get a much higher chance for success if you can find a turning point in a longer time period before switching to a shorter time with the aim of fine-tuning an entry. Besides that, having discipline, patience, and being well prepared will give you an upper hand against traders who trade without any preparations.
The Bottom Line
Once you try out the three forex trading methods, you will realize that there is no method that you could pick out as the best trading method because all of them have their weak and strong points. The best way of analysis is dependent on the timeframe and access to vital information.
If you are a short-term trader, quick access to information is vital as delayed details needed to make a trading decision could result in massive losses. As a long-term trader, access to unique game-changing information is essential before making long-term investments.