Types of Analyses

What is Technical Analysis?

Technical analysis involves studying patterns and structures in past price movements to predict future price behavior. It is a very effective method of analysis.

In financial markets, price movements tend to repeat over time (seasonal, monthly, weekly, daily trends). This happens because human behavior drives prices according to supply and demand. People’s behavior tends to follow patterns, making price movements cyclical.

Example:
Look at the USD/CAD price chart. You might notice that whenever the price approaches the 1.0625 level, it reverses. Using technical analysis, you could consider selling USD/CAD the next time it reaches 1.0625, because the price has historically reversed from this level. This approach allows you to use probability to form trading decisions.

Technical analysis is the most common method used in Forex trading. It can also become a self-fulfilling prophecy: if thousands of traders observe the same pattern, they will act similarly, which pushes the price in the predicted direction.

Important Note: Using technical analysis effectively requires practice and experience. It’s not as simple as it may sound.

What is Fundamental Analysis?

Fundamental analysts focus on the economic strength of a country to inform their trading decisions. Economic news can have a significant impact on currency prices. You can track the release of important news events using a Forex economic calendar.

Fundamental analysis uses economic data to forecast currency movements. By interpreting this data, you can assess the strength of a country’s economy.

Example:
If Europe has a strong economy and the U.S. has a weaker economy, a fundamental trader might choose to buy EUR/USD, expecting the Euro to rise against the U.S. dollar.

Fundamental traders typically hold positions for weeks or months, because economic factors usually do not cause immediate price changes.

One of the most important indicators in fundamental analysis is interest rates. Countries with higher interest rates attract more foreign investments. For example, if you had to choose between a 0.5% or a 5% interest rate, the 5% rate would be more attractive. Over time, higher interest rates tend to increase the value of a currency, as investors seek higher returns.

Example:
If the U.S. has a 1% interest rate and Europe has a 0.05% rate, the U.S. dollar may rise in value against the Euro.