Technical Analysis concentrates on the simple fact that history repeats itself as well as a graphical representation of the market price action. This type of analysis is ideal for long-term to short-term strategies, depending on the timeframe used during the analysis process. Technical analysis is the examination of past price movements to forecast future price direction. It is sometimes referred to as chartist analysis because it relies almost exclusively on charts for analysis. Technical analysis is applicable to foreign currencies, stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Price refers to any combination of the open, high, low or close for a given commodity/security over a specific timeframe. The time frame can be based on intraday (tick, 5-minute, 15-minute or hourly), daily, weekly or monthly price data and last a few hours or many years. In addition, some technical analysts include volume and/or open interest figures with their study of price action.
“Markets are trendy – let the trend be your friend”The first trend theory holds that an uptrend remains intact as long as each successive intermediate is higher than those preceding it and each reaction stops at a higher point than previous reactions. Conversely, a downtrend prevails when each intermediate decline carries price falling short of earlier rallies. When you’ve defined the direction of the market through technical analysis, then follow it! Weekly and monthly charts are useful in giving an idea of how the market has behaved and how it is likely to behave in the future. Once you have selected the nature of the trend you wish to follow, then you can identify the full scope of your trading strategy depending on the timeframe you are comfortable with. In an uptrend market, try to buy the dips to maximize profits. In a downtrend market, try to sell the rallies.
Support and resistance levels are unquestionably among the most important of all technical considerations. They are areas which prices are expected to have difficulty moving beyond, and they therefore deserve careful consideration in buying and selling decisions.
Support and resistance levels on a chart can be divided into three basic categories:
The basic idea behind resistance and support theory is simply that price levels that were significant in the past will have significant impact on price action in the future and should therefore be considered when building a trading plan. Major Support (troughs) The price level or area on the chart where buyer interest is sufficiently strong enough to overcome or digest selling pressure and a price decline is turned back up again.
Major Resistance (peak)
The price level or area over the market where selling pressure overcomes or digests buying pressure and a price advance is turned back.
Validity of Trendline Violation
The Pro-I Trading charting package provides users with key technical analysis indicators such as Moving Averages, Bollinger Bands and Volumes.
Fundamental Analysis focuses mainly on the economic, social and political forces that drive the supply and demand, hence the market price. This type of analysis concentrates on macroeconomic indicators such as economic growth rates, interest rates, monetary policy, inflation and unemployment. The key to fundamental analysis is to gather and interpret this information and act before the information is incorporated into the market price. The lag time between an event and its resulting market response presents a trading opportunity for the fundamentalist. Example Using the currency market as an example, there are times that governments through their Central Banks stand in the way of market forces impacting their currencies. Hence, they intervene to keep currencies from deviating markedly from undesired levels. Currency interventions have a notable and oftentimes temporary impact on FX markets. A central bank could undertake unilateral purchases/sales of its currency against another currency; or engage in concerted intervention in which it collaborates with other central banks for a much more pronounced effect. Alternatively, some countries manage to move their currencies, merely by hinting, or threatening to intervene.
Factors Here are some major fundamental factors that can affect market prices:
Technical and fundamental analyses are both closely linked but they are independent and complementary. Fundamentals assess general market trends while technical analysis is more refined, providing specific entry and exit points for a trade. It is recommended to use a combination of both when defining your trading plan. Any trading strategy in foreign exchange is based on the following assumptions:
If you trade foreign exchange, or Contracts for Difference, you need to understand the core components of online trading – technical and fundamental analysis – to trade effectively and to be able to make trading decisions fast and accurately.
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