Ihab Salloum[ad_1]
Fundamental Analysis vs. Technical Analysis
Fundamental analysis has been popular among forex traders for such a long time. However, the necessity for a bulk of information prompted several forex traders to quit using fundamental analysis and to resort to technical analysis.
Principles of Technical Analysis
In general, technical analysis revolves around its three underlying principles. First, the actual price movements and the market action are more important than their underlying causes. Next, patterns will emerge in the market that can identify the potential trend of the price of the currency. Last, the previous and future reactions of people can also shape the movement of the currency and the changes that may take place in human psychology from time to time are minimal.
Traditionalists vs. Contemporary Approach
These principles of this technical analysis have not received positive acceptance from the loyalists of fundamental analysis. These traditionalists would still prefer the old school perspective that an analysis of the movement of the market should focus on the factors that can influence such movement and on the actual influence itself. For those on the side of the contemporary approach of technical analysis, such information may not be necessary at all times. A technical analysis may already be sufficient to ensure the success of trading.
Using Technical Analysis
In using this type of analysis, you need to gather historical price data and enter these data into a computer. After feeding the data collected, the computer will then develop a graphical format of describing the patterns existing in the data. Looking for price data would not be a problem at all because the supply is abundant in the foreign exchange market. This graphical representation developed by the computer can already identify the current and future movements of the currency. How the currency is expected to move in the future can already be predicted through a comparison of its present and past movements.
Categories of Forex Technical Analysis
The forex technical analysis theory uses five different categories. These categories are taken into consideration in developing forex charts. The five categories are indicators, number theory, waves, gaps and trends. Indicators, also known as oscillators, refer to the Relative Strength Index (RSI), Stochastic oscillator, and Moving Average Convergence Divergence (MACD). RSI measures the ratio of up-moves to down-moves, while Stochastic oscillator indicates if the condition has been overbought or oversold. MACD plots two lines of momentum to signify the likelihood of a change in the trend.
The number theory encompasses Fibonacci and Gann numbers. The Fibonacci number sequence follows a pattern of adding the first two numbers to get the third, while Gann numbers use angles and lines in charts. Waves refer to the wave theory popularized by Elliot, which uses repetitive wave patterns in developing market analysis. Gaps are high-low or open-closing and indicators of an absence of any trading. Trends indicate the direction that the prices are most likely to take. The two most commonly used tools of technical analysis are the Coppock Curve and the Directional Movement Indicator (DMI).
Increasing Popularity of Technical Analysis
Technical analysis has become increasingly popular with the advent of technology and computers. Aside from that, through this analysis, several markets can be studied and evaluated simultaneously by experienced analysts.
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