While most forex traders use either technical analysis or fundamental analysis in their trading strategies, the best traders utilize a combination of both to make their trading decisions. Fundamental analysis uses a forex calendar to look at upcoming announcements of economic indicators to make decisions as to what trades to make. Technical analysis, on the other hand, looks at currency price data in order to detect patterns that could signal entry and exit points for successful trades. While the two approaches may seem diametrically opposed, in fact, they can complement each other so you can make better trading decisions.
You can start the process of combining the two approaches by consulting a forex calendar to decide which currency pairs to trade. This calendar spotlights economic developments that could have an impact on exchange rates. One important indicator you have to keep an eye on is interest rate decisions by national central banks, since there is a direct relationship between these indicators and exchange rates. High interest rates tend to be bullish for the currency, causing the exchange rate to appreciate, while falling interest rates mean that the exchange rate may depreciate.
You can also use the forex calendar to gauge market sentiment, which can be as important as the actual economic data itself. Market sentiment involves the reaction of players in the forex markets to a particular piece of economic news. Based on the market sentiment, you can make an educated guess as to whether currency prices will go up, or down.
Once you have used the forex calendar to determine which currency pair to trade, you can use technical analysis to determine when to enter and exit a trade. The one advantage of trading the currency markets is their huge size, which allows for a greater amount of liquidity and makes it easier to detect trends. Most forex trading platforms have charting software that allows you to chart currency price data using various methods.
The most popular charts are candlesticks because they allow you to view a larger range of data compared with regular line and bar charts. Candlestick charts are so-called because the charted data strongly resembles a candlestick with a wick at both ends. The ends of the ‘candle’ present the starting and ending prices while the wicks stand for the highest and lowest price during a particular trading period.
Another important concept that you need to know are resistance and support levels. Resistance levels are the highest price a currency will reach before bouncing back while support levels while support levels are the lowest before the price starts going back up. Eventually, however, prices will breach these levels and find new support and resistance levels. Before this happens, however, you can identify where these levels are so that you will know when to close a trade.
Once you have learned how to combine these two approaches using a forex calendar and charting software, you can start trading with more confidence. Just do not forget to set stop loss points to prevent you from losing too much money in case the trade goes against you; and always trade with conservative amounts of leverage to prevent you from being ruined by margin calls.