Forex trading is one of the fastest-growing trading activities in Nigeria, with an increasing number of traders entering the currency market. Whatever the case may be, forex trading requires a comprehension and application of both technical and fundamental analysis.
The two forms of analysis are important to any informed decisions on trades, and knowing their combination can give the trader great leverage in the volatile forex market. The paper will discuss different tools of technical and fundamental analysis, which can be used to improve trading performance for active players of Forex trading in Nigeria.
Understanding Technical Analysis
While technical analysis strives to invest most of its research time in studying price movements and history with an attempt to predict future market behaviors, forex trading investors are dependent a lot on charts and indicators that identify patterns and trends. This form of analysis has been very helpful to Nigerian traders, especially, because most forex brokers have provided them with access to charting tools and technical indicators.
Indicators usually used in technical analysis include moving averages, Relative Strength Index, and Bollinger Bands. Moving averages smooth out price data and hence offer a better view of what a larger trend looks like. A trader may use the 50 and 200 day moving averages to come up with buy or sell signals at the instances when the two cross.
RSI, on the other hand, helps traders to realize how the market has reached overbought or oversold conditions. For example, if the RSI surpasses 70, it is most likely that the currency pair has become overbought and thus one should prepare for a reversal. Bollinger Bands helps in measuring volatility in the market. They are useful to the trader because they show him when the market is quiet or where one might expect a breakout. The case being that the forex markets are highly liquid and traders often have to deal with fast price changes, it may be of prime importance in Nigeria to master technical analysis.
Many Nigerian traders study past price behavior to predict any further movement of its change, thus enabling them to make better decisions on the timing of entering or exiting trades.
Understanding Fundamental Analysis
Fundamental analysis in the forex involves the estimation of economic indicators, geopolitical events, and other worldwide news affecting the value of a certain currency. This looks at the broader economic driving factors for the prices of currencies, other than technical analysis, which strictly deals with price action and charts.
To Nigerian traders, the major economic indicators of inflation rates, levels of interest rates, and gross domestic product are considered crucial in terms of currency evaluation. For example, if the Central Bank of Nigeria raises interest rates, it will favor the Nigerian Naira to foreign investors, thus appreciating. However, if political turmoil occurs or the price of oil falls prime export-then the currency deteriorates and leads to depreciation.
Global currencies, such as the USD, EUR, and GBP, are primarily influenced by economic policies and events in their respective countries. Updates on international news, such as decisions of the Federal Reserve in the United States or actions by the European Central Bank, would help a Nigerian Forex trader make more accurate predictions about the behavior of a currency in the forex market.
Traders in Nigeria should also pay attention to the key events of elections, changes in policy, and geopolitical tensions that also influence currency prices. A perfect example is how the COVID-19 pandemic drove major shifts in global forex markets, including Nigeria.
Technical Versus Fundamental Analysis, and the Combination Thereof
The technical and fundamental analysis is a kind of analysis that stands individually for Nigerian traders. However, the combination of both approaches will be the most advantageous. Technical analysis creates an image of short-term insight based on the action of prices and helps to identify points of entry and exit. On the other hand, it is only fundamental analysis that will allow the traders to get an idea about the bigger economic picture for better long-term investment decisions. For example, if the Nigerian trader wants to use technical analysis in the attempt to find a probable buy setup of the U.S. dollar against the Naira, he would always cross-check with the fundamental data upcoming U.S. economic reports or the inflation rate of Nigeria to make sure that the trade is in line with what the bigger market might be. It’s how both forms of analysis are pitched against each other that will make the real difference. Technical analysis can enable correct timing; fundamental analysis will give the confirmation that the trade conforms to the general economic outlook.
Conclusion
The Nigerian forex trader needs technical and fundamental analysis for success. While technical analysis will be able to provide insight into the markets and trend patterns, fundamental analysis will shed more profound light on the economic forces that drive currency movement. With both put together, traders have deeper grounds on which they can make better decisions and raise their chances of profitability in the forex market. Be it that you are a new trader or an experienced trader, your expertise in either area will give you an edge over other traders in Nigeria’s increasingly popular forex trading domain.
