Technical Analysis is probably the most common and successful means of making trading decisions and analyzing forex and commodities markets. Technical analysis differs from fundamental analysis in that technical analysis is applied only to the price action 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 with which to successfully trade shorter-term price movements, and to set stop loss and profit targets.Technical analysis consists primarily of a variety of technical studies, each of which can be interpreted to generate buy and sell signals or to predict market direction. Please see our Technical Studies page for a detailed description of these studies and their uses. Support and Resistance LevelsOne use of technical analysis, apart from technical studies, is in deriving "support" and "resistance" levels. The concept here is that the market will tend to trade above its support levels and trade below its resistance levels. If a support or resistance level is broken, the market is then expected to follow through in that direction. These levels are determined by analyzing the chart and assessing where the market has encounteredunbroken support or resistance in the past.For example, in chart below EURUSD has established a resistance level at approximately .9015. In other words, EURUSD has risen up to .9015 repeatedly, but has been unable to move above that point:
Fundamental Trading Fundamental trading strategies consist of macro, strategic assessments of where a currency should be trading based on virtually any criteria 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.Fundamental analysis alone is often difficult to use when dealing with currencies, commodities and other "margined" products. This is because fundamental analysis does not provide for specific entry and exit points, and therefore makes it difficult to control risk when using leverage.
Forex Market BackgroundThe global marketplace has changed dramatically over the past several years. New investment strategies are becoming more important in order to minimize risk, as well as to maintain high portfolio returns. Among the most rewarding of the markets opening up to traders is the Foreign Exchange market. Identifiable trading patterns, as well as comparatively low margin requirements, have rewarding trading opportunities for many. In contrast to the world’s stock markets, foreign exchange is traded without the constraints of a central physical exchange. Transactions are instead conducted via telephone or online. With this transaction structure as its foundation, the Foreign Exchange Market has become by far the largest marketplace in the world. Average volume in foreign exchange exceeds $1.5 trillion per day versus only $25 billion per day traded on the New York Stock Exchange. This high volume is advantageous from a trading standpoint because transactions can be executed quickly and with low transaction costs (i.e., a small bid/ask spread). As a result, foreign exchange trading has long been recognized as a superior investment opportunity by major banks, multinational corporations and other institutions.Spot foreign exchange is always traded as one currency in relation to another. So a trader who believes that the dollar will rise in relation to the Euro, would sell EURUSD. That is, sell Euros and buy US dollars. Forex-Training.com has compiled the following guide for quoting conventions:
Symbol
Currency Pair
Trading Terminology
GBPUSD
British Pound / US Dollar
"Cable"
EURUSD
Euro / US Dollar
"Euro"
USDJPY
US Dollar / Japanese Yen
"Dollar Yen"
USDCHF
US Dollar / Swiss Franc
"Dollar Swiss", or "Swissy"
USDCAD
US Dollar / Canadian Dollar
"Dollar Canada"
AUDUSD
Australian Dollar / US Dollar
"Aussie Dollar"
EURGBP
Euro / British Pound
"Euro Sterling"
EURJPY
Euro / Japanese Yen
"Euro Yen"
EURCHF
Euro / Swiss Franc
"Euro Swiss"
GBPCHF
British Pound / Swiss Franc
"Sterling Swiss"
GBPJPY
British Pound / Japanese Yen
"Sterling Yen"
CHFJPY
Swiss Franc / Japanese Yen
"Swiss Yen"
NZDUSD
New Zealand Dollar / US Dollar
"New Zealand Dollar" or "Kiwi"
USDZAR
US Dollar / South African Rand
"Dollar Zar" or "South African Rand"
GLDUSD
Spot Gold
"Gold"
SLVUSD
Spot Silver
"Silver"
Spot Forex versus Currency FuturesMany traders have made the switch from currency futures to spot foreign exchange ("forex") trading. Spot foreign exchange offers better liquidity and generally a lower cost of trading than currency futures. Banks and brokers in spot foreign exchange can quote markets 24 hours a day. Furthermore, the spot foreign exchange market is not burdened by exchange and NFA ("National Futures Association") fees, which are generally passed on to the customer in the form of higher commissions. For these reasons, virtually all professional traders and institutions conduct most of their foreign exchange dealing in the spot forex market, not in currency futures.The mechanics of trading spot forex are similar to those of currency futures. The most important initial difference is the way in which currency pairs are quoted. Currency futures are always quoted as the currency versus the US dollar. In Spot forex, some currencies are quoted this way, while others are quoted as the US dollar versus the currency. For example, in spot forex, EURUSD is quoted the same way as Euro futures. In other words, if the Euro is strengthening, EURUSD will rise just as Euro futures will rise. On the other hand, USDCHF is quoted as US dollars with respect to Swiss Francs, the opposite of Swiss Franc futures. So if the Swiss Franc strengthens with respect to the US dollar, USDCHF will fall, while Swiss Franc futures will rise. The rule in spot forex is that the first currency shown is the currency that is being quoted in terms of direction. For example, "EUR" in EURUSD and "USD" in USDCHF is the currency that is being quoted.The table below illustrates which spot currencies move parallel to the futures contract and which move inversely (opposite):
Forex
Symbol
Currency Pair
Futures
Symbol
Directional
Relationship
GBPUSD
British Pound / US Dollar
BP
Parallel
EURUSD
Euro / US Dollar
EU
Parallel
USDJPY
US Dollar / Japanese Yen
JY
Inverse
USDCHF
US Dollar / Swiss Franc
SF
Inverse
USDCAD
US Dollar / Canadian Dollar
CD
Inverse
AUDUSD
Australian Dollar / US Dollar
AD
Parallel
NZDUSD
New Zealand Dollar / US Dollar
ND
Parallel
