Forex Education

Types of Analysis

Technical Analysis

Technical analysis has been around for hundreds of years, but it only came into popular use in the last few decades. With the introduction of computers and the internet, technical analysis has grown into the most widely used form of analysis amongst retail traders.

Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action. It all sounds very boring, doesn't it? Well get used to it. Unless you want to hold a trade for a few months using fundamental analysis, technicals will soon become your best friend.

Technical works on three principles:

1. The trend is you friend. The main principle of technical analysis is that the market moves in trends. At its core, technical analysis is just a way of predicting market trends based on the study of past trends. From trends that last minutes to trends that last years, techs are always there. (Trending means a consistent price movement in a single direction)

2. History is a broken record. The second principle is that history repeats itself. If 90% of the times after a certain chart pattern forms the price begins to trend, it stands to reason next time the pattern forms it will probably cause a trend. It does get more complicated than that, but just remember: every form of technical analysis is based on the principle that history repeats itself.

3. Price action is king. The third principle is that price action is the most important thing in the market, as it is the most visible and direct indication of strength/weakness. (Price action just means price movements)

Fundamental Analysis

Fundamentals can be split into two categories: 'direct impact fundamentals' and 'long-term impact fundamentals'. As a retail Forex trader, for the most part you only need to worry about the direct impact fundamentals. This is simply because the long-term impact fundamentals affect the market over a period of months and weeks. As a retail trader you will probably not be holding a position for that long. In any case I will discuss both.

Direct impact

Direct impact fundamentals cannot be covered in a few paragraphs. They cannot even be covered in a few pages. In this section I am only going to give a brief summary of what they are. When you finish reading the rest of this course you can move on to the more advanced explanation of direct impact fundamentals.

Direct impact fundamentals are more commonly referred to as economic releases. The term "economic release" covers everything from the announcement of a country's interest rates to announcements concerning unemployment. When you hear on the news that unemployment is down, it is because that figure was probably released earlier that day. These numbers are a closely guarded secret until the moment of release. It comes down to the second and traders around the world are waiting with open ears to hear that number when it is released.

If, for example, unemployment is higher than it was expected, that means more people than expected have no job. Generally speaking this is bad for a country's economy, and usually it causes the corresponding currency to lose value. I call these reports direct impact fundamentals because the second they are released they have an effect on the market. You can see a calendar of economic announcements at www.forexfactory.com. When you see it, do not get overwhelmed. There may be a lot of reports but not all of them have a direct impact on the market. Their effect on the market is dependent on the significance of the data being released.

Long term impact

I am not trying my best to confuse you here, but it is likely when I write my next sentence you are going to think "what the....". Direct impact fundamentals are also long term impact fundamentals. After they cause their direct impact, they begin to cause their long term impact. The difference is that long term impact fundamentals are more like a puzzle. You need a lot of the direct impact pieces to fit together to cause a long term impact.

Think about it this way. In the past 2 months, most of the direct impact reports are better than expected (good for the nation's currency). This will probably translate to a long term positive impact on the nation's economy. That was easy, right?

If any of this confuses you (it confused me when I first heard it) never mind. For now read all about technicals. When you graduate to the Special Forces you can read all about fundamental analysis.