The technical analysis of forex and fundamental forex represent two distinct and distant currents of thought. We will now explain what this type of operation is and how it can interface with the fundamental study. We will also explain why they are both important for the success of an investment.
The technical analysis of forex is based on prices and their movements over certain periods of time. The study should be used by an investor or trader to try to minimize the risk of investment loss. One of the key issues concerning this activity is its reliability. Many people think that a good studio is enough to give certainty in the success of an investment: nothing more wrong.
Depending on the type of platform used for this type of operation, it is possible to visualize the graphs live and thus be able to carry out the technical analysis in real time. This type of service is essential to have the opportunity to invest properly: some services and software to operate in real time forex, immediately report when it is time to intervene with a specific trading signal.
It's about analyzing how a professional trader is operating and copying the type of transaction through his broker: in this way you can interact with the forex market in real time and check immediately if it was worth it.
Before carrying out the in-depth analysis, let's try to guide you through the technical analysis and establish some concepts related to forex in general: with this term we can summarize the concept of foreign exchange market, which can be considered today the most important international market for economic transactions.
During each day, approximately 2000 billion dollars are traded in FX markets around the world through transactions from central banks, multinationals, global governments and speculators. This type of economic structure originated in 1971 when the so-called floating exchange rates entered the market, hitherto prevented by the Bretton Woods agreement, according to which it was impossible to engage in such speculation on the currency markets.
Since these agreements came into force, close to the Second World War, the objective has been to stabilize international currencies by fixing reference exchange rates with the dollar; the latter currency was then related to gold, whose exchange rate was fixed at 35 dollars per ounce. Prior to 1944 and Bretton Woods, gold was used as a unit of measurement for currencies, and in this way, it was possible to avoid devaluations of money that were carried out properly by those who governed the countries.
Technical studies are based on probability and the market itself is not based on accuracy but on probabilistic calculation. As the market players' opinion gives weight to the forecasts, we will never have exact figures but only data that are repeated over time and subject to sudden and unpredictable changes.
One of the most common mistakes is to base our investments only on analysis operations without considering the unpredictable effect of our possible gains. A good study is based on the long term and the development of the currency in question. The study does not predict the future, but only provides long-term data on which to base its investments in the market. One of the most common errors is to make short term analyses.
Another common mistake is also to use too many indicators. In this case, in fact, there is a risk of giving too many variables to the graph that will risk appearing too "certain" of some results and consequently it would risk giving us too many securities that do not actually exist. Indicators must be few and rigid, useless to give too much weight to a "forced" analysis and its results.
Of course, we are not talking about an exact science and it cannot be the only analysis to be implemented for a good investment. The fundamental study must always be integrated with the technical one to have two distinct "opinions" based on different parameters. Interfacing the two analyses is the best way to have more certainty, even if of certainties, in forex, we never speak.
If, for example, the results of the two technical analyses differ, this means that the investment is risky and it is advisable to change the target. In conclusion, it should always be borne in mind that the more analyses are carried out, the more the probability of investment error is reduced to a minimum. In another article we will discuss the fundamental analysis and its characteristics in more detail.
The currency market is also based on the fundamental principle of economic theory, which establishes that the price of a product is characterized by the matching of supply and demand.
The demand for a currency is linked to its supply: demand comes from importers who purchase goods and services and from investors, who are attracted by the possession of securities qualified in the same currency. It should be stressed that the determination of the price and therefore of the strength and stability of a currency is also linked to the economic, commercial and financial conditions of a country. The link is formed by the reactions of the monetary authorities. In this case, however, we talk about macroeconomic variables (which contribute to influence exchange rates) among which we can certainly count:
They are usually divided into four categories:
We close today's article with an invitation: consult our in-depth analysis of Japanese candles (candlestick and inside and outside candles); it will help you to analyze the changes that the market takes in its most venial inclination. If you then take this with the right interest, we can also recommend another reading: moving averages, which are a good indicator for minimizing the price volatility of a financial instrument. Supports and resistances are also concepts that fit into this scenario, because they illustrate price thresholds that create blocks for the various trends (realists or bearish). Still about in-depth analysis, we recommend reading our intervention on the leverage effect.
CFDs are Contracts for Difference, instruments used to move the prices of shares, government securities, indices, etc., in the market. CFDs are used at precise times in the market. For example, if you think that certain actions, in an already bullish context, could rise even more level, it's time to buy.
We have seen how, in the field of technical analysis, it is also necessary to consider in depth the psychological aspect that in fact can influence the market even in a more than decisive way.
Before we talk about Strike price we need to take a small look at some concepts related to call and put options.