Ikhtisar:Every trader wants to be profitable. After opening an account with a cheap and reliable broker, it is time to learn the 2 main ways currency traders make money – fundamental analysis (FA) and technical analysis (TA).
Every trader wants to be profitable. After opening an account with a cheap and reliable broker, it is time to learn the 2 main ways currency traders make money – fundamental analysis (FA) and technical analysis (TA).
#1 Fundamental Analysis (FA)FA looks at the factors which affect the economy. Such factors include interest rates, unemployment rate, policies and more. At the very essence of FA is the demand and supply of the country‘s currency. Let’s explore further.
Strength Of Economy
Do you remember that currencies are traded based on the difference in strength of 2 economies? If you believe that Europe‘s economy is faring better than USA’s, you would go long on EUR/USD.
Interest Rate & Currency Value
Interest rate is used as a tool to cool or stimulate the economy.
In a booming economy, the central bank will likely raise interest rates to prevent the economy from overheating. With a higher interest rate (also known as the cost of borrowing), debtors will want to repay their loans as soon as they can to avoid paying more in the form of interest.
On the other hand, when the economy is sluggish, central banks will likely lower interest rates to encourage more loans for the expansion of business activities. This is due to the fact that the cost of borrowing has decreased.
As a trader, what does this mean to you?
The currency of the country with a higher interest rate is more attractive. Imagine you are living in a developed country with high interest rates. Would you be more enticed to save your money in a local bank as compared to saving your money in another country with lower interest rates?
A higher interest rate will attract more inflow of funds and thus indirectly increase the demand for that currency. A higher demand for a currency will lead to the increase in value of the same currency.
Please note that I am referring to the countries of major currencies.
With this said, the long-term direction of the value of a currency hinges heavily on the interest rate policy direction undertaken by the central bank.
For a more in-depth understanding of the many economic indicators, I highly recommend this book by The Economist.
#2 Technical Analysis (TA)TA is the study of price movement. Technicians (practitioners of TA) believe that news, events, and the outlook of the economy have been priced in.
The actions of market participants leave behind a footprint on charts and TA will help you to uncover their footprints.
Past Prices Are Significant
This is a core belief in TA. Historical prices can determine current and potential price movements due to human psychology and behavior.
As the saying goes, history tends to repeat itself. Through the study of the technical charts, you can identify potential zones for trend continuation or change.
Price Patterns
Technicians look for similar patterns that have been formed in the past, studying the likelihood of a similar movement in the near future.
Tools
Technicians use a whole host of tools to help them plan their trade. Some of the common tools include support and resistance, trendlines, channels, Fibonacci calculations, and moving averages. Combine this with their knowledge of price action, technicians sieve for the most promising currencies to trade.
ConclusionBoth methods of analysis can be profitable. You may even want to incorporate elements of both methods!
「About The Author」
An independent trader who seeks to educate through his own trading
experiences, Jay began his own trading journey at the age of 22.
He is a self-taught trader who has read more than 200 books on
trading and investment since college and created his trading
methodologies modelling after several successful veteran traders.Jay has
since amassed 10 years of experience trading different market
conditions with consistency. Of the many disciplines in trading, he
specializes in trading options, swing trades on equities,
currencies,futures and contract-for-difference (CFDs).
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