Working out your personal finances is tricky enough but when it comes to the financial market, it can get a little complicated.
People have traded stocks for many years but there are now lots of different ways that you can trade in the financial markets. But to do this, you need to have a basic understanding of how the market works and how to analyse it.
That’s why we have made a breakdown of what is technical analysis and how can it help you when starting out as a trader.
What is forex trading?
Before we can get into the technicalities of technical analysis, you need a basic understanding of forex trading. Forex trading is the market of trading international currencies. The word ‘forex’ is just a shortening of ‘foreign exchange’.
It works in a similar way to stock traders buying and selling stock. However, in this instance, traders are trading different currencies. They buy large amounts of money in one currency and convert it into another, taking a profit from it.
The goal is obviously to make as much off one transaction as possible. Forex traders tend to buy low and sell high to make the biggest profit. However, like all types of trading, it is a risky way to make money. This is why it’s not always a lucrative deal for those who don’t have prior knowledge of the market.
Another big difference between buying stocks and buying currency is that the stock markets are closed on the weekends. However, the currency market is always open meaning there’s always the opportunity to trade.
Another benefit to trading currency rather than stocks is that it’s also open for 24 hours a day. You can move from London to New York to Tokyo to Sydney as everything opens and closes. This means there’s even more opportunity to trade – but there also needs to be some time to sleep.
But how do you know what to trade and when? That’s where the technical analysis aspect comes in.
What is technical analysis?
Technical analysis is what people use to study the markets and predict what is going up or down as a result. The idea behind it is that someone can look at what has happened to certain currencies previously and guess what they will do in the future.
There are no definites when it comes to the financial markets, especially in recent years. However, forex trading is more about working with possibilities and probabilities. There is no job working in financial trading that doesn’t take a bit of risk so it’s all part of the job.
Getting well versed in the analytics of it all is the only way to become top of the game in terms of trading. Let’s take a look at what types of analysis can help you become a great trader.
Three types of technical analysis
- Fundamental analysis
Fundamental analysis is the analysis you do when looking at the economic and political information you have of a particular country. This information can guide you in terms of what could be happening with their currency.
This fundamental analysis can help you forecast what is going on currently and what could happen in the not too distant future. This type of analysis puts the emphasis on trends rather than looking at specific rates and currencies.
There are lots of factors that can influence fundamental analysis and those are: interest rates, GDP growth, industrial production, consumer price index and retail sales.
- Technical analysis
Technical analysis also uses historical data to predict what will happen in the future but they use different kinds of charts to do so. They use line charts, bar charts, and candlestick charts to analyse the data.
Line charts help you see what has happened from one period of time to the next and gives you the big picture in terms of trends. Bar charts help you see the range of the prices within each time period. And candlestick charts show similar information to the bar charts but with a bit more detail in terms of opening and closing prices.
- Sentimental analysis
The other types of analysis are purely figures based but sentimental analysis deals with the human aspect. This analysis is based on the opinions of investors and traders and deals less with figures and more with feeling. The more experience a trader has, the more you can trust their opinions.
Now you’ve got the lowdown on analysis within trading, how do you feel about getting involved?