Financial assets move up and down every day. These movements are caused by either fundamental or technical reasons. As a trader, it is very important for you to know how to do these types of analysis to predict the future direction of a financial asset.

Fundamental Analysis

This is the type of analysis where traders look at the intrinsic value of an asset. In terms of currencies, investors tend to invest in countries that are doing well economically, compared to those with major economic issues.

To measure the performance of a country, traders look at certain economic indicators. These include measures on inflation, the number of jobs added, the manufacturing and service industries, and the pace of interest rates.

A commonly used theory in all this is the Phillips Curve. This theory states that wages of a country tend to rise when the unemployment rate is going down. In turn, this causes inflation to rise which increases the chances of a rate hike from the central banks.

The same fundamental logic applies when thinking about commodities, indices, and stocks. For example, when trading crude oil, its price will always move depending on the supply and demand. Signs of increasing supplies tend to push crude oil lower. This drop can be supported by signs of increasing demand.

In stocks, traders look at the financial news about a company. Mostly, traders buy companies that show signs of increasing revenues, margins, dividends, and share buybacks.

Technical Analysis

In technical analysis, traders look at charts to identify patterns which can help them determine the future movements of financial assets. Some patterns can be identified visually. Others require technical indicators to spot.

Technical indicators are simply mathematical calculations and patterns that factor in multiple aspects of the price of the asset.

These indicators tell traders different things. Some tell them that a trend is forming while others tell them that a reversal is near.

For example, traders use the Relative Strength Index to determine whether an asset is oversold or overbought. When it is overbought, it is a signal to exit a long trade or initiate a short trend. They use the Average Directional Index to determine whether an asset has formed a trend or not. The Parabolic SAR is used to predict the direction of the chart.

Other than technical indicators, there are other charting tools that help traders set precise locations for the price movements. For example, they use the Fibonacci Retracement tools to identify the key support and resistance levels. Also, they use the Elliot Wave Patterns to foresee how the chart will move.

Key Points

At first, these concepts seem difficult to traders. However, if you are really interested in trading, you will grasp them within a few months.

In technical analysis, you should only spend your time studying and using a few of these indicators. Learning so many of them will complicate your trading career. The most common technical tools you should consider are: Moving Averages, Stochastic, Bollinger Bands, Relative Strength Index, and ADX.

In fundamental analysis, you should take time to study the global economy and then narrow down your study to the specific country you want to focus on. For example, if you trade the EUR/USD pair, you should learn to know the GDP growth, the industry performance, the inflation rate, the number of jobs created, the retail sector, and the service industry of Europe and the United States.


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