<Last updated 25.04.2020>
Hi! If you are interested in online trading you should read the below that provides important information regarding the different kind of analysis that exist.
What is the difference between fundamental and technical analysis?
> Fundamental analysis focuses on the overall state of the country’s economy, such as productivity, employment, manufacturing, international trade, and interest rate.
Fundamental analysis is a way of looking at the market by analyzing economic, social, and political forces that may affect the supply and demand of an asset.
You must understand the reasons of why and how certain events like an increase in the unemployment rate affects a country’s economy and monetary policy which ultimately, affects the level of demand for its currency.
The idea behind this type of analysis is that if a country’s current or future economic outlook is good, their currency should strengthen the more foreign businesses and investors will invest in that country. This results in the need to purchase that country’s currency to obtain those assets.
Higher interest rates make dollar-denominated financial assets more attractive.
Whenever you hear people mention fundamentals, they’re really talking about the economic fundamentals of a currency’s host country. A vast collection of information – whether in the form of economic, political or environmental reports, data, announcements or events. Using supply and demand as an indicator of where price could be headed is easy. The hard part is analyzing all of the factors that affect supply and demand. As the economy gets better, raising interest rates may be needed to control growth and inflation. Fundamental data takes shape in many different forms. It can appear as a report released by the Fed on U.S. existing home sales. It can also exist in the possibility that the European Central Bank will change its monetary policy.
Speculations of interest rate hikes can be “priced in” hours or even days before the actual interest rate statement.
Economic indicators provide some insight into how well a country’s economy is doing.
Fundamental analysis is a valuable tool in estimating the future conditions of an economy, but not so much for predicting currency price direction. Fundamental information in the form of reports, economic data releases or monetary policy change announcements is vaguer than actual technical indicators.
The market tends to react based on how people feel. These feelings can be based on their reaction to economic reports, based on their assessment of current market conditions.
> Technical analysis is the framework in which forex traders study price movement.
A person can look at historical price movements and determine the current trading conditions and potential price movement.
“History tends to repeat itself “. Technical analysts look for similar patterns that have formed in the past and will form trade ideas believing that price will act the same way that it did before.
What’s more is that with all the traders who rely on technical analysis out there, these price patterns and indicator signals tend to become self-fulfilling.
Technical analysis is employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume.
>Let’s also talk about Sentiment Analysis.
(a view or opinion that is held or expressed.)
Kidding aside, the market basically represents what all traders – you, Warren Buffet or Celine from the donut shop – feel about the market.
As a trader, you must take all this into consideration. You need to perform sentiment analysis. It’s up to you to gauge how the market is feeling, whether it is bullish or bearish.
Fundamental factors shape sentiment, while technical analysis helps us visualize that sentiment and apply a framework to create our trade plans.
Why are interest rates important?
The forex market is ruled by global interest rates. A currency’s interest rate is probably the biggest factor in determining the perceived value of a currency. a country’s central bank sets its monetary policy, such as interest rate decisions. Too much inflation can harm an economy and that’s why central banks are always keeping a watchful eye on inflation-related economic indicators, such as the CPI (Consumer Price Index) and PCE (Personal consumption expenditures price index).
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