Are The Technical Analysis Tools Used for Stocks the Same for FX Trading?
If you are considering currency trading in the Forex market or you are already involved in Forex currency trading, here's a money-making lesson that we can borrow from investors who use technical analysis to help them make investment decisions in the stock market.
The goal of performing technical analysis when currency trading is to predict profitable currency pair movements by analyzing price trends. The principles of technical analysis in the equity markets are the same as those in the Forex currency trading markets. In fact, the only real difference between the two is that the Forex market is open 24 hours a day while the equity markets are not.
Trend Analysis in Technical Strategies
Technical analysis is a blanket term for a variety of strategies that depend on the interpretation of price action in a stock. Most technical analysis is focused on determining whether or not a current trend will continue and if not, when it will reverse. Some technical analysts swear by trendlines, others use candlestick formations, and yet others prefer bands and boxes created through a mathematical visualization. Most technical analysts use some combination of tools to recognize potential entry and exit points for trades.
For example, a chart formation may indicate an entry point for a short seller for example, but the trader will look at moving averages for different time periods to confirm that a breakdown is likely.
Technical Analysis Tools in Detail
Elliott Waves — Developed by Ralph Nelson Elliott, this methodology is based upon the theory that market performance can be predicted by studying wave patterns that develop over a period of time.
Fibonacci Studies — Developed by 12th century mathematician Leonardo Fibonacci, this methodology is based upon the theory that changes in trends can be predicted based upon prices interacting with lines based upon certain sequences of numbers.
Intra-Day vs. Long-Term Trading
Price movement that occurs within a 15-minute time span may be very significant for an intra-day trader who is looking for an opportunity to realize a profit from price fluctuations occurring during one trading day. However, that same price movement viewed on a daily or weekly chart may not be particularly significant or indicative for long-term trading purposes.
Fundamental Analysis: The Pillar of Investing
Fundamental analysis is the cornerstone of investing. The biggest part of fundamental analysis involves delving into the financial statements and performing a quantitative analysis. This involves looking at revenue, expenses, assets, liabilities, and all the other financial aspects of a company to gain insight into a company’s future performance. When talking about stocks, fundamental analysis is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company's actual business and its future prospects. On a broader scope, fundamental analysis can be performed on industries or the economy as a whole.
One of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stock's "real" value, but in the long run, the stock market will reflect the fundamentals.
Challenges and Criticisms of Fundamental Analysis
The biggest criticisms of fundamental analysis come primarily from two groups: the proponents of technical analysis and believers of the "efficient market hypothesis." These groups argue that fundamental analysis has limitations and that market prices reflect all available information.
Industry Analysis and Competitive Strategy
Industry analysis provides pivotal conclusions about which industries will survive the anticipated economic situation. Michael Porter suggested the competitive strategy analysis framework, a standard approach to industry analysis. His five components of industry structure pertain to "the threat of new entrants," "the rivalry among existing competitors," and "the substantial threat of substitutes." "The buyer's bargaining power and supplier's bargaining power. A financial analyst by considering each one of the five aforementioned elements can appraise more efficiently the industries' responses to the prospective economic environment.
After deciding which industries currently appear appealing, the subsequent act is proposing specific firms within the industry.
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