A forex analysis is used by a retail day trader to better understand what the best time is to buy/sell a specific currency pair. The analysis can be based on economic indicators and current news or with the aid of certain tools and charts, otherwise known as a fundamental analysis.
The forex trader’s currency trading system makes use of analysis that is based on buy/sell decisions under specific circumstances. These forex trading analysis are often developed by seasoned traders themselves.
What Fundamental Analysis is
Fundamental analysis allows you to understand certain changes in the forex exchange market by monitoring GDP, unemployment rates and interest rates as well as emerging economic releases from the countries you’re focusing on.
For instance, a day trader analyzing the EUR/USD currency pair through a fundamental analysis will be more interested in the Eurozone, in contrast to the US. In addition, they also need to be on top of emerging economic developments pertaining to those countries.
What Technical Analysis is
Technical analysis is an automated or manual system that takes into account past price movement in order to foresee where any given currency might be headed.
Using this approach manually, a trader would be required to analyze technical indicators and use them to determine when to buy or sell.
When making use of the analysis automatically, the trader will try to teach the software so as to what signs to look for and how to make forecasts based on those signs. However, many traders feel that automating the task effectively takes out the “human element” from the equation, which may be seen as detrimental in terms of trading.
It’s important to keep in mind that there is no “ideal” analysis method for a forex trader. Depending largely on the trader’s access to information and time frame, either method might work best.
To conclude, technical analysis may be more viable for those who have access to delayed economic data only, but “real time” access to quotes. On the other hand, a long-term trader may prefer a fundamental analysis, if he/she has access to the latest economic data and news reports.