Did you know that forex traders can be classified into three groups? There are those that belong to fundamental traders and on the other side of the coin, there are those that belong to technical traders. There are also those that belong to that group that practices the principles of the two aforementioned groups. How about a closer look to the groupings?
Fundamental traders utilize macro and micro economics to predict the general direction or shift in a trend. Their analysis involves the current economic situation of the currency issuer as well as economic events that may affect the specific country and currency.
Since a wide variety of events can affect any one currency, fundamental traders usually have their eyes on the news. Anything from political upheaval to natural disasters can have a huge effect on the economic situation. The key is how they react to this information with their given understanding of global economics. They must be ready to react to changes on the fly.
Fundamental analysis is used for both long term and short term trades. Major economic news releases such as unemployment rates, trade balance announcements and interest rate changes are usually of great interest and can offer great insight to the future trend of a currency pair. Fundamental traders generally put more faith in fundamental analysis than they do technical analysis. As such, there are some that concentrate on economics alone.
Unfortunately, a true understanding on the workings of global economics is difficult to attain. For the rest of us, there is Technical forex trading.
Technical trading is by far the most popular and well known strategy employed in the forex market today. The reason is simple. Technical analysis is far easier to grasp than fundamental analysis is for the vast majority of traders out there. Technical analysis is also far easier (as well as a lot quicker) to teach, which is why most forex trading courses out there concentrate on the technical aspects of trading. Technical analysis enjoys widespread recognition as a result.
Technical analysis attempts to predict the future movement of the market from past market movements. It is based on the assumption that history eventually repeats itself. The information seen on the charts are viewed as “complete” as it is assumed that the price accurately reflects the supply, demand and external factors such as the political and economic situation for a given currency. It is also the heavy study of market trends.
Technical and Fundamental Analysis Combined
Finally, there are those that draw from both technical and fundamental analysis. I would say a good portion of forex traders fall in this category although there is definite bias. While forex traders can utilize both disciplines with success, they are more likely to favor one over the other. Most currency traders incorporate technical analysis more than they ever would fundamental analysis. Yet both are used.
In the end, every forex trader will find his or her “sweet spot” when it comes to analysis. This is based on a number of things such as personality, aversion to risk and their natural liking to either one of both the disciplines.