Although analysis is not all that the trader must master in order to become profitable, without successful analysis it is altogether impossible to even identify any purpose in trading.
The trading process comprises the identification of our goal, adjustment and review of the risk profile of a potential trade, analysis of the price action, entry of various orders that manage our risk, and finally the opening of a position.
At every stage of this process, forex analysis is the most important tool helping the quantification of the risk/reward profile of the trade.
Forex analysis is divided into two main branches. Fundamental analysis is used to tie the price action to the economic activity that goes on in the background and generates the quotes observed on the trader’s screen. In forex fundamental analysis, traders incorporate everything from political climate, central bank policies, traditions and character of a nation to natural disasters into the calculation of the profit/loss potential of a trade.
With all this wealth of information, fundamental analysis is best suited to the purpose of identifying the causes behind market events. On the other hand, the other branch called technical analysis concentrates on the price action alone and excludes everything else from its calculations.
Indeed, the main principle of technical analysis stipulates that the price already discounts all the information available to market participants at any point in time. In other words, the time spent on reading data, evaluating news releases and other developments is wasted. The market, as if it were a giant living organism, has already absorbed the data available, and reflects the sum of all information on the price quotes.
Different traders have different approaches to analysis, but it is possible to recognize three groups on the basis of their styles of analysis. Many institutional managers, hedge fund directors, and bank traders are skeptical of the efficacy of technical trading, and base their decisions and analysis entirely on fundamentals, using technical tools rarely, and often only for the purpose of identifying entry/exit points.
In contrast, some market legends like Martin Schwartz and Larry Williams, along with a significant number of financial commentators, in addition to a large number of retail traders utilize technical analysis to the exclusion of all signals generated by the interpretation of fundamental factors. Finally, a third group which has followers in every trader profile is constituted of those who combine these two approaches to generate trade signals.
There is no right or wrong school in Forex analysis It is possible to achieve healthy returns as long as analysis is coupled to proper money management methods. Study of analysis, and its practice, along with adherence to the principles of money management guarantee that success will arrive eventually.
The only real danger is sloth. So draw your charts, define your trend lines, study the price action. Whether you use news flow to understand it, or derive your signals from the market action alone, you will be on the right path leading to profits.
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