Fundamental analysis in Forex is a type of market analysis which involves studying of the economic situation of countries. It gives information on how the economic and political events influence the currency market.
Fundamental analysis is based on key economic indicators that can influence various currencies
Those trading in the foreign-exchange market rely on the same two basic forms of analysis that are used in the stock market.
When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis.
Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:
* To conduct a company stock valuation and predict its probable price evolution,
* To make a projection on its business performance,
* To evaluate its management and make internal business decisions,
* To calculate its credit risk.
Technical analysis is a security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume.
The principles of technical analysis derive from the observation of financial markets over hundreds of years.
Technical tools and theories have been developed and enhanced in recent decades, with an increasing emphasis on computer-assisted techniques.
While fundamental analysts examine earnings, dividends, new products, research and the like, technical analysts examine what investors fear or think about those developments and whether or not investors have the where with all to back up their opinions; these two concepts are called (psychology) and supply/demand. Technicians employ many techniques, one of which is the use of charts. Using charts, technical analysts seek to identify price patterns and market trends in financial markets and attempt to exploit those patterns.
Supply and demand indicators monitor investors’ liquidity; margin levels, short interest, cash in brokerage accounts, etc., in an attempt to determine whether they have any money left.
Other indicators monitor the state of psych – are investors bullish or bearish? – And are they willing to spend money to back up their beliefs. In the end, stock prices are only what investors think; therefore determining what they think is every bit as critical as an earnings estimate.
Technicians using charts search for archetypal price chart patterns, such as the well-known head and shoulders or double top/bottom reversal patterns, study technical indicators, moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags.
There are many techniques in technical analysis. Adherents of different techniques (for example, candlestick charting, Dow Theory, and Elliott wave theory) may ignore the other approaches.
Many traders combine elements from more than one technique.
Some technical analysts use subjective judgment to decide which pattern(s) a particular instrument reflects at a given time, and what the interpretation of that pattern should be. Others employ a strictly mechanical or systematic approach to pattern identification and interpretation.
Some traders use technical or fundamental analysis exclusively, while others use both types to make trading decisions which conceivably is the most rational approach.
History tends to repeat itself. Technicians look at the history of a security’s trading pattern rather than external drivers such as economic, fundamental and news events. Price action also tends to repeat itself because investors collectively tend toward patterned behavior.
Technical analysis is widely used among traders and financial professionals, and is very often used by active day traders, market makers, and pit traders.