Technical & Fundamental Analysis for Forex Strategy (Part-2)
Hi, how are you? In the previous article ( can be read here ), I discuss fundamental analysis. Well, this time I will discuss more about technical analysis as one method you can choose to develop your forex strategy .
OK, let’s just start .
What is technical analysis?
Technical analysis is a method that is actually “younger” than fundamental analysis. Even so, a long period of use has made this method one of the “weapons” popular among traders, perhaps even the only tool that can be used to determine entry and exit levels, especially for short-term trading .
Technical analysis is based on three assumptions about market movements.
First , technical analysis believes that market movements are a reflection of all the information circulating in the market ( discounts everything ).
Second , the assumption that price movements are not random movements, but always moves in certain trends ( price moves in trend ).Therefore technical analysis can be used to recognize the current trend (up, down, or flat) and become the basis for making decisions for the transactions to be made (buy or sell).
The third assumption is that price movement patterns tend to repeat over time ( history repeats itself ). In other words, market behavior in the past tends to happen again. By understanding and recognizing the patterns that occur and knowing the “history” of price movements when the pattern arises, a trader will be able to make a decision whether he wants to open a buy or sell position.
Complete package: price movements
OK, so because of the three assumptions above, technical analysis considers that price movements themselves can provide information about what is happening in the market, what sentiment is developing in the market. Anyway, price movement is a “complete package” that can provide all the information we need in developing a forex trading strategy .
In essence, by studying market behavior in the past, we will be able to estimate the direction of future market movements, so that we can make decisions according to these estimates.
How did it happen?
To explain this, I will use simplification by analogy as follows:
One time you want to cross the road. What you usually do is look right and left, right? After you ensure that the road is safe enough for you to cross – because the traffic flow is quite quiet and there are not many vehicles passing by – then you cross.
Why did you decide to cross? Because based on your EXPERIENCE, the possibility for you to be safe to the other side is quite large in quiet street conditions. So, you make that decision based on your knowledge: it’s safe to cross if the road is quiet from a vehicle.
Such is the concept applied in technical analysis.
Technical analysis advantages
Technical analysis is quite simple and clear compared to fundamental analysis. There are many tools available for EVERYONE, even for beginner-level traders to traders of investment manager caliber.Technical indicators are often easier to understand than fundamental indicators, which usually require a longer time to learn.
Because technical analysis only focuses on price movements, technical traders only need these three things: price movement charts, technical indicators (including price patterns ), plus capital management (including risk management).
Although technical analysis is basically very simple, but still there are some things you need to understand. Technical analysis can provide several different signals, depending on the interpretation of the trader who uses it.
So, before deciding to use technical analysis as your forex trading strategy , you should first learn the basic concepts of technical analysis.
Then, continue to train your ability to analyze charts. By knowing your abilities and weaknesses, it will increasingly make you more skilled in technical analysis. And if your abilities get better, success is only a few steps away.
Fundamental and technical analysis are just as useful in studying and estimating market behavior. So, which method should you use?
Your trading style also determines which method you should use. If you are the type of investor who likes to hold positions for the long term, fundamental analysis might suit you. If you are the type of short-term trader, then technical analysis can be the right choice.
Simply put, please choose which method you like, of course with its advantages and disadvantages. Before deciding, it’s a good idea to study the two methods a little deeper.
Or, you can combine fundamental analysis and technical analysis at once. This strategy is also popular in forex trading . Incidentally, we have already discussed it on this blog.