To evaluate trading opportunities, investors use fundamental and technical analysis.
Investors may choose to take a conservative low risk, medium risk or high risk approach by using limit orders and stop orders to manage risk in addition to employing fundamental and technical analysis.
Fundamental analysis consists of macro strategic assessments of where a currency should be trading based on but the price action itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other fundamental elements. Fundamentalists track and study economic figures, political news, market expectations, monetary policy, Central Bank operations and market intervention and analyze it to predict its potential impact on the markets.
Fundamental analysis alone is often insufficient to use when dealing with currencies, commodities and other "margined" products. This is because fundamental analysis does not provide specific entry and exit points, and therefore makes it difficult to control risk when using leverage.
Technical analysis is probably the most common and successful means of making trading decisions and analyzing Forex and commodity markets. It consists primarily of a variety of technical studies that can be interpreted to generate buy and sell signals and predict price patterns and market directions. It is a methodology that can be applied almost in any market.
Chart reading is successfully enhanced by the use of computer-based statistical analysis which creates oscillating indicators showing over-bought/over-sold conditions, the pace and direction of momentum and the relative performance of one item against another or against the market. One part of this analysis is to analyze price charts and identify short, medium and long-term trends, pinpointing future potential trouble areas. “Bar charts”, “point” and “figure charts”, “candle charts”, “swing charts”, volatility and momentum or relative analysis are all tools that are available with a study of technical analysis and should lead to better investment performance, with a consistent and intelligent application.
Differences between Fundamental and Technical Analysis
Technical analysis is applied only to the price of the market, ignoring fundamental factors. As fundamental data can often provide only a long term or delayed forecast of exchange rate movements, technical analysis has become the primary tool used to successfully trade with shorter-term price movements, and to set stop loss and profit targets. Fundamental analysis is more effective in predicting trends for the long term (longer than one year), while technical analysis is more appropriate for shorter time horizons (0-90 days).