Like other financial markets, the forex market has two primary methods of performing market research that traders can then use to base their trading decisions on. Technical versus fundamental analysis has been a long-standing debate amongst investors, but for day trading or short-term trading technical analysis is the way to go. Technical analysis is the study of price charts and basically any information that can be compiled from them, such as volume analysis, cycles, trends, and statistics. Technical analysis is used to forecast price movements, as well as provide methods of entry and exits from trades.
Technical analysis in forex market involves the use of technical indicators and charts to predict price movements of a currency. Forex traders who use technical analysis in their trading have lauded it as a very effective tool in currency trading. Technical analysis usually focuses on the movement of prices of a currency in the market. Charts are used to show how prices are moving; when the prices are trending as well as the strength of those trends. Oscillators, momentum and volume indicators give a clearer scenario of the market action. Using charts you can obtain price movements details at a glance.
Technical analysis is simple and straightforward, with tools available to everyone from the seasoned hedge fund manager, to the novice retail trader. In addition, technical tools are easier to interpret than fundamental indicators, the understanding of which usually requires a period of diligent study. Finally, since technical analysis focuses on the price action exclusively, the technical trader has only one needle in his compass: the price, on which any calculation about profits or losses must be based.
While some fundamental analysts liken technical analysis to reading tea leaves or palms, technical analysis provides one of the best and most objective tools available for quickly and accurately assessing a market and then trading it profitably. One of the potential benefits of technical trading consists of the fact that the same data is also being watched by millions of other traders. This phenomenon can lead to a herd effect in some cases when classic chart patterns can be clearly observed. In essence, the many traders who see the pattern and trade accordingly can help the pattern’s measured move materialize.
Technical analysis and fundamental analysis are often seen as opposing approaches to analyzing securities, but many investors have experienced success by combining the two techniques. For example, an investor may use fundamental analysis to identify an undervalued stock and use technical analysis to find a specific entry and exit point for the position. Often times, this combination works best when a security is severely oversold and entering the position too early could prove costly.