Technical Analysis Vs. Fundamental Analysis: How World Events Affect the Forex Market

by Andrew McGuinness     Jul 16, 2019

Once limited to governments, banks, and billion-dollar investors with millions to spend, the Forex market is an excellent investment zone for new investors, presenting more opportunities today than day trading on the American market alone. However, while it may be simple to enter and make your first trade, successful long-term Forex trading requires you to have a strategy and to understand how the events going on in the world will affect the changes in currency conversion rates. If you are thinking about Forex Trading, one of the first things that you need to know and understand is the difference between technical analysis and fundamentalist analysis, and make a decision on how to incorporate these two analysis techniques together while also navigating international events such as natural disasters, political changes, and others, which can heavily affect the values of the world's currencies.

When it comes to Forex Trading, there are two main strategies that you can follow to analyze the market: the technical approach or the fundamental approach. Technical analysis involves a purely mathematical approach; technical analysts take long-term approaches to trading, charting the fluctuations and changes in currency cycles through decades of data. Most currencies go through price oscillation patterns, and technical Forex traders use this data to decide when the best time is to invest and sell currencies. On the other hand, fundamental analysts use social and historical data to choose where to invest their money. They use economic data and anthropology factors to determine which countries are likely to trade with one another in the future, and analyze patterns in the markets between pairs of countries to choose when the most profitable time to buy is. Though each individual trader uses a certain percentage of both of these strategies, most analysts like to incorporate their own individual combination of data to formulate their market strategy.

The problem for traders (typically fundamental analysts) occurs when a drastic world event occurs and throws off the usually stable Forex market. Foreign currency exchange is relatively predictable; however, when a natural disaster, terror attack, rebellion, or other major world event occurs, a massive and unpredictable riff in the market occurs. The values of entire currencies can crash through the floor in a single day. For example, the terror attacks that took place in the United States on September 11th, 2001, set in motion a series of events that would throw the country into a decades-long involvement in the Middle East, and foreign investors in the United States suddenly found their currencies worth drastically decreased in value. Even the most thorough history buff cannot fully predict the movement of these types of sudden currency shifts, as random natural disasters can also seriously affect the movement of the market as well.

So, how can these world events affect your Trading? Trading on impulse is not the best way to make money when trading forex. In short, every Forex Trader should make sure that his investments have built-in safeguards like trading limits or stop losses to prevent unexpected events from crashing their fortunes. Being a smart Forex Trader means investing time into these safeguards because, realistically speaking, another world tragedy is always around the corner.

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