Trading With Currencies: Type of Analysis

Technical and fundamental analysis are essential tools when it comes to trading with currencies. Seemingly, each type of analysis has different types of traders as supporters:

  • Fundamental analysis is the choice of long-term traders. It is because they focus on analyzing stocks, currencies, cryptocurrencies, options, and commodities. 
  • Technical analysis is more suitable for short-term traders. The reason behind this is that they seek instant info instead of waiting to profit from long-term price movements.

Whatever type of trade you prefer, it is valuable to know each of these approaches. In the end, it will make you a better trader able to profit on any market opportunity.

Technical Analysis For Trading With Currencies

Technical or Fundamental analysis for trading with currencies

Technical analysts study price movement to spot trends. Finding the best entry price is the ultimate goal, according to the rules of technical analysis. 

To elaborate on this, they believe that the price already includes all relevant information. For this reason, they focus on the charts of various time frames. By doing so, they tend to forecast future price movements accurately. 

According to technical analysis, market price movements are not purely random. They state that prices move in identifiable patterns and trends that repeat over time. 

Therefore, the most common tools in the technical analysis are:

  • Trend lines
  • Support and resistance levels
  • Moving averages
  • Chart patterns
  • Fibonacci, and 
  • MACD indicator. 

The first two are great for technical traders using them to determine the right places to buy or sell. 

On the other hand, more and more traders look for specific chart patterns. Seemingly, knowing the model will give an undoubtful insight on the future price moves. There are numerous patterns, and some are very picturesque. For example, some look like flags, rectangles, head and shoulders, cup with the handle, etc. 

It is vital to know that these patterns apply to the Forex market. At the same time, lots of people use technical analysis of Forex when trading some other assets.

Sometimes, these analyses bring results. However, the point is that you need to understand how each market behaves.

Example no1 – FIAT example of Technical Analysis for the Trading With Currencies

Trading with currencies - USD/EUR example

In this case, we examined the technical analysis of EUR/USD from 26.09.2017 in a 1-hour chart.

As long the price is below this trend line, there is no indication of the trend reversal. Thereby, EUR/USD is in the sell zone (traders are still in short–SELL position on this pair).

To give the point of view, on this one-hour chart, I marked support and resistance levels. These are 1.1760 (support), and 1.1860 (resistance).

These levels represent the current trading range. Breaking above/below these levels would open the way to 1.1900 (resistance 2) or to 1.1700 (support).

Example no2 – CRYPTO example of Technical Analysis for the Trading With Currencies

Trading with currencies - Litecoin Example

In this case, we examined the technical analysis of Litecoin from 15.05.2019.

On this chart, I also marked support and resistance levels. In this case, short term support and resistance levels are $90 and $120. If the Litecoin jumps above $150, that would be a “BUY” signal. It is because Litecoin could jump to $180.

However, if the Litecoin jumps above $200, that could be a strong signal of the trend reversal. In this case, it is a free way to $300.

On the other hand, if the Litecoin falls below $80, that will be a reliable “SELL” signal. Seemingly, the next target could be around $70.

Fundamental analysis

Fundamental analysis has a different approach. Unlike the technical, the goal is to examine data over multiple quarters or years. 

The goal of fundamental analysis is to determine the real market value. It applies for stock, cryptocurrency, currency, or commodity. Thereby, fundamental analysis is a way of looking at the market by overall analytics of economic, social, and political forces. Of course, all of these may affect the supply and demand of an asset. 

If you choose to use fundamental analysis, you are focusing on the big picture. When investing your money, you should know every little detail.

Forex trading

Forex type of trading with currencies

It is the trading of currency such as EUR, USD, or YEN. In this case, fundamental analysis is:

  • Country’s performance
  • Inflation
  • Interest rates
  • Decisions of central banks
  • The unemployment rate
  • Economic cycle

The country’s currency will be stronger with the better shape of the country’s economy.

Stock trading 

Fundamental analysis are the key for stock trading

Besides the performance of the economy where the company resides, the company’s performance is crucial:

  • Revenue
  • EBITDA
  • Earnings per share
  • Total debt
  • Total equity
  • Treasury stocks
  • Capital expenditures
  • Market capitalization

Cryptocurrencies

Cryptocurrencies

When doing analysis for trading with cryptocurrency, you should consider several things: 

  • The characteristics of the coin
  • How active is the development
  • How engaged is the community
  • What is the transaction activity

The cryptocurrency market is now very attractive. It attracts the attention of major banks, businesses, and governments. Seemingly, all have an interest in the potential of technology. Expectances are that the blockchain will provide greater efficiency and transparency in transactions. 

My opinion is that this is a highly speculative market, but with significant potential. At this moment, many coins have limited support outside of crypto-exchanges. For this reason, it can be challenging to figure out what coins to add to your portfolio. 

Because of all of this, I would recommend everybody to be careful. Investing a small sum of money in cryptocurrencies (an amount of money that you can “risk”). In any case, not more than several hundred USD. The best period for me is between 3-5 years. Just hold and wait.

Conclusion

In the case of trading with currencies, whether it is crypto or Fiat, it is crucial to do a lot of research. Since there is no single winner, it is wise to identify currencies that are likely to fit together. It is because, after all, it is an overall financial ecosystem.

In my opinion, every trader or investor who wants to become profitable should analyze the whole system. Therefore, it is a combination of technical and fundamental analysis. Seemingly, it is the only wise model to make decisions. 

It is because fundamental analysis helps you to figure out the real market value. At the same time, technical analysis helps you to find a better entry or exit position by predicting price movement. 

Doing both makes you a winner!

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