Forex - Fundamental and Technical Analysis Explained

By CJ Hall

There are two types of analysis used in the forex market: fundamental and technical. Many currency traders develop systems that favor one type of analysis over the other, but it is important to have at least a basic understanding of how each of them function.

Fundamental analysis is the study of various economic and political events, and their influence on the currency market. A weak economy will lead to lower exchange rates, while a strong economy will lead to higher valuation of the country's currency. Interest rates, Gross Domestic Product reports, trade balances, and unemployment rates are the main economic indicators a fundamental trading system will use.

Another important tool for fundamental analysis is an economic calendar. An economic calendar is a listing of all of the important events and economic indicators that affect the currency market, and ranks their importance. It will contain previous figures, what the forecast is, and updated figures as they are released.

Technical analysis relies on using the price history in order to try and predict its future movements. Forex charts are analyzed using a variety of technical indicators. Trend lines, support and resistance levels, fibonacci levels, and moving averages are commonly used to identify what is going on with the market and where it is likely to go.

There are 3 types of moving averages used for technical analysis: simple, weighted, and exponential. A simple moving averages weigh each price point equally over a specific period of time. These price points are averaged, and a line is drawn on the chart. A weighted moving average will place more emphasis on the latest data. Weighted moving averages tend to give more accurate volatility estimates than simple moving averages do. Exponential moving averages are calculated by multiplying a percentage of the most recent price by the previous periods average price. Exponential moving averages will respond to recent price changes much faster than simple moving averages will.

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