forex-analysis

Forex Analysis

Now that you are through with the basic elements that go into every single trade, it is time to delve further into the different strategies to use to determine the possible movements in the market.

You must already be familiar with the different factors and forces that cause currencies to gain and lose value over time.

This time we will explore the different analytical strategies to put this knowledge to good use.

A lot of traders will take pieces of these strategies to formulate their own personalized approach in analyzing currency movement.

What is important to know is that there are no perfect strategies, but some trading strategies do work better than others.

It is up to you to determine which of these strategies will work for you and your trading comfort levels. Sometimes, even the best strategy will not work.

You must not assume that the Forex market will never be beneficial, instead accept the fact that there will be ups and down when trading Forex.

Introduction to Analysis

Forex analysis can be thought of as being divided into two separate analytical schools of thought; fundamental analysis and technical analysis.

Fundamental analysis mainly looks at the overall context of a currency, while technical analysis primarily focuses on raw and historical data.

Fundamental analysis focuses on economic, political, and financial factors while a technical report focuses on charts, patterns, and other inherent movements.

Fundamental analysts mostly do not consider technical analysis as an effective way to determine the market’s movement as they mainly look at the forces outside of the Forex market.

The external factors that are primarily looked at are the different relationships of the countries and businesses that directly affect the exchange rates, which include the complex economics and macroeconomics of the factors that drive prices up and down.

In contrast, technical analysts don’t really pay attention to external forces and are mainly concerned with past rates and data, future trends, and recent patterns.

For these types of traders, the Forex market is a self-contained ecosystem with internal factors that determine fluctuations dependent on the buying and selling of different currencies.

As an example, an increase in the value of the euro over the US dollar will be seen by a fundamental analyst as a result of specific changes with the relationship of the EU and the United States.

They might also consider factors such as the countries’ comparative interest rates and their respective inflation rates.

Traders using this school of thought might also try to formulate an educated guess as to whether the trend would continue based on fundamental variables that can be ascertained from sources such as news reports, financial reports, and other predictive data.

Technical analysts, on the other hand, will see the rise in the value of the euro to the US dollar as nothing more than a new uptrend.

They will analyze both the current and past chart values and using various technical tools, analyze whether the trend will continue or return.

School of Thought Comparison

A lot of new traders would often ask the question, “Which is better?”

Technical analysis and fundamental analysis both have their own advantages and disadvantages.

The main reason for the divide is primarily because both types of analysis have proven track records of being somewhat accurate.

Those who personally prefer fundamental analysis would argue that it has a superior efficacy because the movement in relation to economic data is observable.

The connection between economics and the value of their respective currencies is undeniable, while in some cases the relationship may only become clear in hindsight. However, there are some cases where economic strife or improvements contradict market movements in very counter-intuitive ways.

In most cases, the underlying fundamental factors directly relate to significant currency movements.

Traders that quickly jump on these movements, either by their own analysis or through someone else’s conclusions, will tend to be greatly rewarded for their efforts.

Meanwhile, technical analysts argue that their method is much safer given that each trade is more specific and has the backing of large amounts of data.

Trades using this particular method are every exact, and almost no emotional factor is at play.

The types of patterns and data used in this method are quantifiable and observable, negating the need for speculation and argument.

Unlike fundamental analysis, which might be up for debate or is subjective, raw data and chart patterns are more exact and concrete in technical analysis.

Trades made through this method are only executed when all indicators are supportive of the final analysis.

The ace in the hole for technical analysts in the entire argument is the fact that technical analysis can be applied in almost all types of asset trading, including the stock market and securities market.

Fundamental analysts would have to overhaul their previous trains of thought in these markets as they would have to learn its unique framework when compared to the Forex market.

Technical analysts will have no problems jumping into these other types of markets given that the charts and patterns still work in the same way.

A technical analyst that was previously trading commodities will have no problems jumping into the Forex market; although he or she would have to familiarize himself or herself with the peculiarities of the Forex market beforehand.

Fundamental Analysis

As previously mentioned, fundamental analysis will deal mostly with the external factors that affect the price of any particular currency.

Certain factors are quantifiable, while others are qualitative.

Some of the more concrete factors will involve economic and financial factors; this includes quarterly earnings reports and economy-related political movements.

The more qualitative factors will involve developments in the realm of investor sentiments, political crisis, and other geopolitical developments.

Fundamental analysis is sometimes referred to by traders as a complicated art form to master, as it will require a lot of investigative and analytical skills to piece together different factors that will ultimately result in a robust forecast.

There are a lot of competing narratives that will often confuse fundamental analysts, but those that can read into the situation will more often than not come up with the best forecasts.

Global Interest Rates and Inflation

Global interest rates play a significant part in the movements within the Forex market. It can also be said that global interest rates rule the Forex market.

A specific currency’s interest rate determines its perceived value as much as its actual value compared to other currencies.

Fundamental analysts closely track and look at each country’s central bank and its respective monetary policies.

Each country has its own central bank. The United States has the Federal Reserve, the UK has the Bank of England, Switzerland has the Swiss National Bank, the EU has the European Central Bank, and Australia has the Reserve Bank of Australia, and so on.

The main determining factor for the rise and fall of interest rates in any given country is to maintain price stability and control inflation.

Inflation is the increase in the prices of goods and services within a country. The sustained increase is closely related to the purchasing power of a country’s currency.

Hence, inflation is inevitable and is part of a growing economy.

A country’s central bank will need to control its country’s inflation through the adjustment of its currency’s interest rate.

Too much inflation will directly harm the economy as a whole, and central banks will have to find a way to keep it at a comfortable level to sustain an acceptable growth rate.

An increase in interest rates will lower overall growth, while at the same time slow down the country’s inflation rate.

This happens because businesses will now borrow less money, which will, in turn, prevent their establishments from growing.

In contrast, when interest rates are lowered, more businesses will borrow money, boosting expansion, capital spending, and economic growth.

A currency’s interest rate will determine how much capital will be going in and out of a certain country.

Investors are more inclined to place their money in countries with higher interest rates, thus increasing the demand for that country’s currency.

The higher the demand, the stronger a currency becomes when compared to other currencies.

This also works inversely; when a country’s interest rate is low, demand for its currency decreases.

This makes that country’s currency weaker when compared to other currencies.

Fundamental analysts consider these interest rates when trading different currency pairs.

In most cases, interest rates don’t change a lot, and changes don’t happen very often.

Interest rates also don’t make drastic movements, which means that if a currency’s interest rates have dropped significantly over a long period, it will likely increase again at some point.

The key here is to try to determine the direction of the interest rates of a particular currency.

One way of determining the direction of a particular pair’s movement using interest rates is through a technique called “interest rate differential.”

This method typically involves the comparison between one currency’s interest rate to the interest rate of its paired currency.

The difference between the interest rates is what fundamental analysts look at to determine possible shifts in the prices of the currency.

When the interest rates of two currencies move in opposite directions, a significant movement is likely going to happen.

That’s pretty much about Global Interest Rates and Inflation.

Economic Indicators

Economic factors calculate the statistical information of the country’s
economy.

The economic indicators preview the patterns, performance, and future predictions of an economy.

As beginners, you must understand that economic indicators have a massive impact on trading.

If you don’t understand economic indicators, trading might become complicated.

The leading factors of financial systems links with economic indicators.

Each indicator differs as per the target group, origin, and on various markets.

The indicators are divided by region so that it’s convenient to handle and understand, so such divisions are European indicators, Asian indicators, and US indicators.

Economic indicators and surveys are often released.

However, due to the advancement of technology, anyone can access economic data and indicators whenever they want.

As Forex traders, you must understand the impact created by economic indicators on the Forex market.

You must analyze them to make a proper decision in trading. So, more important indicators that you must know include:

  • Interest rates
  • Unemployment rate
  • Changes in the Gross Domestic Product (GDP)
  • Consumer Price Index (Inflation)
  • Employee Cost Index (ECI)
  • Purchasing Managers Index (PMI)
  • Producer Price Index (PPI)
    Federal funds rate
  • Income
    Beige Book
  • Balance of Trade
  • Mutual Fund Flows
  • Corporate Profits
    Business Outlook Survey
  • Currency Strength
  • Consumer Credit Report
  • Wholesale Trade Report
  • Durable Goods Report
  • Employment Situation Report
    Industrial Production
  • Money Supply
  • Productivity Report
  • Retail Sales Report

However, you must understand that frequencies of indicators will differ monthly, weekly, or even daily. Only after proper speculation, economic indicators are updated, and Forex and other traders make sure to be up-to-date with speculations.

All their trading moves will be based on speculations.

When you look at an economic situation, it will have an impact when announced and during the speculation.

Both situations will create a shift in the Forex market.

For example, when a government issues building permits, there will be more jobs, when there are more jobs, the unemployment rate will reduce.

Hence, the consumption rate will increase while resulting in strengthening the value of local currency.

Let me put it simply, and an economic indicator will provide the information that a trader needs when understanding the things happening in the economy. If you consider the U.S. economy, it is a happening economy.

You will not be able to predict that easily; hence, economic indicators are important to get a good understanding of the market.

However, you will come across lagging indicators as well as coincident indicators.

Different traders use economic indicators in different ways.

However, to benefit from economic indicators, you must focus on market analysis.

You can do primary research or consider analyses, and the choice is yours.

For example, when a trader is aware of the event to be taken place, he or she will speculate the market.

Based on it, the trader will select a certain instrument to Forex trade.

The trader must anticipate the trade properly if he or she wants to acquire substantial profit.

When you are speculating the economic indicators, it is important to know about financial events, markets, and all the general factors that will have an impact on the economic indicators.

If you are through with these details, your speculation will be firm.

As a beginner, you must become comfortable with using the economic calendar and learn how it links to economic indicators.

Once you understand it, you’ll get a clear view of its impact on Forex trading.

If you utilize economic indicators successfully, you’ll be able to achieve success in Forex trading, and you’ll learn to manage your expectations as well.

Anyway, before you utilize economic indicators, you must use the information accordingly to match with the context.

Of course, raw data is valuable, but you must be vigilant to use it.

Luckily, you are benefited from the profit groups and different governments because they conduct surveys to provide information to the traders.

On the other hand, if you try to do it on your own, you won’t be able to do it as successfully as profit groups and different governments.

If you want to trade Forex successfully, you must have an economic calendar with the updated information.

If you have the economic calendar, it is easy to include all the essential releases and events that will impact the Forex market.

For beginners, an economic calendar is one of the most useful tools because it helps to identify the market moves.

You can use the foretasted and the actual values to make proper decisions in trading.

You can select a few indicators and master it so that you’ll be able to use it successfully when making a trading decision.

But, it doesn’t mean you can’t use all the indicators in trading. Anyway, the choice is in your hand as per your understanding.

But remember, you will never find that magic indicator that tells you to trade because there isn’t any.

It is you who has to use the indicators carefully to benefit from trading.

Debt

Forex debt is something that is unnecessary because naive traders fall into debts deliberately.

Most naive traders assume high leverage will bring them higher profits.

But, when you handle with high leverage even without prior experience, you are pushing yourself to a dangerous situation.

Hence, before you begin live trading, you must use a demo account to become familiar with the market.

It’s apparent that a higher percentage of novice traders lose money because they ignore the logical factors.

They are aware that trading a live account without experience will lead to debts, yet they are greedy to make money.

If you think Forex is simple so that you can make easy money, you’ve got it wrong.

Most naive traders end up facing huge financial losses because they don’t have the capital to cover up their losses.

However, the underlying problem with Forex debt is greed and improper risk management.

If the trader is greedy, he or she may even try to benefit from the last pip. But, one can avoid greed by expanding their vision about market opportunities.

And the next is improper risk management, so for this, you must learn the risk management concept before you begin live trading.

Even a professional trader must understand risk management to protect the Forex account.

But, if you are already in debt, you must try to save some money to increase your capital. Of course, it will take some time, but you can do it!

Politics

Most beginners don’t understand the Forex market.

Even though they know about fluctuations in the currency value, they do not know how the currency value has fluctuated. Many factors including politics affect price fluctuation, and naive traders don’t spend the time to understand this overwhelming process.

If a country is facing a war, it will have a huge impact on the country’s currency value.

Basically, political factors may affect a country’s currency value positively or negatively. The effect will be based on the war situation of the country.

Yet, currency exchange will have some differences.

As beginners, you must keep an eye on this! But, remember, stable countries gain more recognition than the countries that don’t prevail in peace.

Likewise, numerous political factors impact the Forex market.

Hence, as traders, you have to keep your eyes open to the changes.

Psychology

Psychology is a huge part of Forex trading.

Most professional traders emphasize the importance of psychology in trading.

Some professionals believe it is more important than academic knowledge.

When we consider the trading mistakes, the basement for the highest number of mistakes would be psychology.

Traders are humans, so no wonder that psychology is taking a toll on humans.

The constant mistakes are directly related to the psychology of traders.

Different emotions act as a barrier to naive traders. For example, fear is one of the emotions that constantly attack naive traders.

Even if the trader is confident in trading, it will be hard to make up the mind to enter into trade and the reason is fear.

In this case, the trader will be wasting a lot of time trading the demo account.

Hence, fear has a huge impact on trading.

Of course, human minds look for the safer option, but in trading, you have to handle risks to reach the top.

If you are pulling yourself away from entering into a trade, it means you’re pulling yourself from the chances of earning profits.

No matter what others say, you will not be able to avoid the trading fear unless you try to avoid it on your own.

For that, you must make an effort to understand the trading psychology in detail.

But, let me tell you. If you know your weakness, it is more than enough to become successful.

If you know that you fear entering new trades, you can work on it and improve your trading behaviors.

But, think about the ones who don’t know what’s going wrong in their trading style.

Of course, they will keep on trading until they blow their account completely.

Hence, if you know your weakness, you will overcome soon!

Charts

Initially, reading the charts can be confusing, but over time you’ll understand.
There are different displays as per the price displayed.

The Japanese candlesticks are the most common price method considered by most traders.

However, candlestick charts are preferred on the Forex chart because it is easier to read.

When you are reading the charts, you must use the patterns to understand the price and the market movement.

If you don’t prefer this, you can opt for line charts. You can find the closing price when you use the line chart.

Or you can opt for a bar chart which is just like the candlestick chart.

When you make use of the bar chart, you will be able to find the price opened and closed in the Forex market.

The best thing is you can use the technical analysis to read Forex charts.

Even if you don’t prefer technical analysis, you can benefit from it when you are using it on Forex charts.

You can include technical analysis of your charting system because it is allowed by most systems.

Yet, try to get the best out of the technical analysis when you have difficulties in identifying the price.

Anyway, you must remember that keeping things simple is the best way to trade successfully.

So, there we end Forex analysis.

But remember, learning Forex is a continued journey so the more you learn, the more you find!

Published by

MagForex has been actively trading currencies since 2008 and up until today, he is still very passionate about it.