1. Understanding technical analysis
The technical analysis includes price charts and indicators for the analysis of the market direction. Technical analysis helps you identify points for possible inputs and outputs to your transactions.
In contrast to fundamental analysis, technical analysis focuses mainly on market and price patterns. Fundamental analysis, on the other hand, refers to factors that drive market prices. The two analytical methods can be used independently or in combination.
Technical analysis focuses on time and price patterns, which is why you often consider it a neutral tool. To find forex-based trading opportunities, you need to analyze the current market price and identify levels with potential targets. While technical analysis does not provide guaranteed results, it does provide estimates for the probability of different market movements.
2. Importance of technical analysis
The majority of traders use technical analysis to determine the expected direction of the market. Market movements are not just random. When traders see an upcoming pattern, there is a good chance many other people will notice it. You can imagine the trend as a phenomenon that is almost self-fulfilling. In this sense, you can say that traders help to create a pattern that is discovered in market prices.
3. Understanding fundamental analysisIn the previous sections, you learned that technical analysis focuses mainly on trends and price action. Fundamental analysis has a different approach to market evaluation, providing a comprehensive picture of market weakness and its strengthening.
A fundamental analyst focuses on factors that could affect a particular currency in strengthening or falling. This includes political and economic data as well as natural disasters.
In short, a fundamental analyst uses all available information to detect the strengthening of a currency. The focus is on financial reports and data, including GDP and unemployment data, production data and interest rate announcements.
4. Fundamental factors that affect exchange rates
Natural disasters such as hurricanes, tsunamis and floods can significantly affect a currency by appreciation and devaluation. A good example is the tsunami that struck Japan in 2010. It neutralizes a country’s construction sector and disrupts the production of the automotive industry and the mobile technology industry.
As the demand for products and services from a particular country increases, so does the demand for that country’s currency.
Economic production and development
A country’s GDP is among the most important indicators of economic growth. Concentrates the production of goods and services in the country providing information on the performance and economic development of a country.
Inflation – This factor has two important indicators:
Consumer Price Index – Calculates the change in the average cost of consumer goods and services.
Producer Price Index – Calculates the change in the cost of producing goods and services for producers
Sovereign interest rates are probably one of the key factors in determining the value of a currency, as they determine the flow of world capital in and out of a country or economic region.
Usually, political instability has a negative effect on a country’s currency demand. Investors tend to dislike countries and currencies with political imbalances.
A country’s fiscal policy, including government spending, budget and taxes, can influence investors’ investment decisions.
Whatever monetary policy is adopted by central banks, they have a significant impact on short-term demand for currency.
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5. Selecting entry and exit levels
Forex traders are exposed to trading risks, regardless of their approach. That’s why understanding price action is a key factor when setting up a transaction and when you stay out of the position. Here, you will learn the four basic concepts of price action used in forex trading to determine entry and exit points
Support & Resistance: Support and Resistance refer to significant levels where the price touches and returns many times over. You can think of them as key points where supply and demand meet.
Disintegration : Disintegration is the transition from defined levels of support and resistance. Disintegrations are strong signals, especially when confirmed by other indicators such as echoes.
Opening: Opening is important as long as the buyers (up) or the sellers (down) make their moves. However, you must certify a new trend using multiple indicators before joining.
Side markets: A forex market that trades sideways refers to price actions at specific levels of support and resistance. When a market trades sideways, traders prepare for a split.
6. Transaction risk management
Until now, you should keep in mind that forex trading is risky. The market is quite volatile and higher potential profits mean, higher risk. Here are some risk management tips.
Avoid Excessive Transactions
While volatile markets may be tempting, a good rule of thumb is to avoid risking more than 2% of your account in a single transaction. Most of these transactions can expose you to losses that may be difficult to recover.
Set stop loss so you can minimize losses
Trading success is not just about winning. In contrast, it is the total gains and losses in transactions. This is what makes stop-losses important in terms of profitability. Setting stop-loss orders will also eliminate the need for constant monitoring of your position.
7. Transaction risk management
While you can’t reproduce the risks with real money, the demo environment will help you comfortably test your investment strategy. Every new strategy needs to be tested over time before it can give you confidence in the money you are investing in it.