When it comes to analyzing the financial markets, there are two main types of analysis, fundamental analysis and technical analysis. There are up and down sides to both of them and It really depends on your trading strategy and trading mindset what suits you the best. Some traders find technical analysis easier than fundamental while some traders find it otherwise. I am going to explain both of them and you can decide based on your plan of action and trading psychology.
Financial news tends to produce great effects on market fluctuations. The use of financial announcements to predict the future price movements is called fundamental analysis. Since forex is all about supply and demand of the currencies so as a news breaks it will either affect the supply and demand in a positive way or a negative one. In either case, price will show significant fluctuations. Some news events produce more fluctuations than others. For example FOMC rates or ECB fund rates will fluctuate the prices much more than CPI or PPI. Some traders place the pending orders in both directions with reasonable pip difference so that both of them don’t get executed. As the news breaks and the market starts to move in one direction, one of the orders is filled and you can make some nice profits.
But here is the down side to fundamental analysis. Sometimes you might find that despite good news announcements, prices shoot off in the opposite direction. Well, a kind of sentiment exists between traders about the upcoming news and they trade on the basis of expectations. So, say, if USD is expected to appreciate after the upcoming FOMC funds rate announcments, then many traders will already buy USD. After the news breaks, there are two possibilities, either USD appreciates or depreciates. If USD appreciuates then traders either buy more or they start selling to exit the trades. If they buy the sentiment will become self fulfilling and USD may increase even more in value. But if they sell then USD will opposite than what was expected. If USD depreciates then trades will instantly exit the trades to avoid losses but it will not cause any significant decline in prices because it is against the expectation of the traders.
Its kind of hard to grasp but news trading will not always be what you expect. Sometimes it may produce very nice gains but most of the time it will create noise on your price charts.
In forex analysis, all you need is essentially the price. Making trading decisions based on price movements, chart patterns and trading indicators is called technical analysis. You can either base your decisions off of naked price chart as many “price action” traders believe or you can use indicators to give you trading signals. I will expound on price action and the use of indicators in separate articles.
Many traders believe that what ever happens in the financial world is displayed on the charts. Because whatever happens that affects a currency, affects its price and that is what charts show you. So if you can simply learn to read a naked chart for price movement, trends and consolidations you can make efficient trading decisions.
some traders use indicators to predict the price movement. These indicators use the currency price and evaluate it based on certain parameters to generate a trading signal. There are some built in indicators which come with your trading platform while there are millions of third party indicators that you can download for free. But the fact that they utilize the primary information i.e. price to generate signal undermines their authenticity a great value. As a signal is generated via an indicator, it may be delayed and thus less efficient.
Which one is better? Technical analysis or fundamental analysis:
In my opinion technical analysis is the best if you trade the raw price action off of the naked price charts. To quote Nial Fuller, “Trading is already complicated enough, don’t overcomplicate it by using indicators”. Whatever happens in news announcements manifests itself in the form of price on a price chart. If your price chart is cluttered with messy indicators, then you will have troubles looking for potential trades on your chart and might miss out some great opportunities. Just the bare chart with key support and resistance levels will be sufficient enough to trade like a pro. All you need is time to learn, experience which comes from screen time and ice cold discipline to make it to the list of pro traders and start earning a full time income from forex trading.