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Forex Market Analysis Methods

Successful trading can't be possible without some data analysis. Here we'll discuss what information can be useful and how to work with it to make the right trading decisions.   

Fundamental analysis of the Forex market

Fundamental analysis is an analysis of the economic and political situation in the countries whose currencies are traded in the Forex market. The task of fundamental analysis is to assess the possible impact of certain events on the movement of currency rates.

Fundamental analysis includes the analysis of economic indicators. They are published regularly and provide an opportunity to study trends in the economies of different countries. The results of such research allow us to explain the current movement of exchange rates and predict future movements. For example, when in the U.S. there is a constant increase in consumer and production prices. It is accompanied by an increase in employment. So the market may begin to talk about the possibility of raising the rate, which, in turn, may lead to a dollar increase.

Fundamental analysis of the Forex market1

Forex market technical analysis

The technical analysis is based on graph analysis. They say that a chart is the embodiment of the influence of fundamental factors on the market.

The following postulates are taken into account during the analysis:

 

  • Inside the chart, there is all the information about the market.

  • The market has a memory and, therefore, based on what was in the past, you can predict the future.

  • On the basis of these postulates has been developed a wide range of indicators of technical analysis, whose task is to help "predict" the future movement of currency rates.

Advantages of technical analysis

Fundamental macroeconomic analysis is very complicated. In most cases, it is impossible to take into account all factors affecting the market. Technical analysis is much simpler, as it explores only one object - the price chart.

Technical analysis has a large number of supporters who are active participants in the market. They use the same charts, getting similar results and making the same conclusions. This mass consistency, in its turn, affects the price movement, forming it in a favourable direction. Thus, the self-execution of the forecast takes place.

Technical analysis is universal - it can be used in various financial markets almost without changes.

Combination of fundamental and technical analysis

There are frictions between the advocates of fundamental analysis and technical analysis about the importance of a particular type of analysis. The former argues that understanding the underlying processes in economics and politics is sufficient for successful trading. Secondly, they say that there are so many events and they are so diverse that it is almost impossible to say for sure about their impact on the currency market.

Experienced traders, who successfully work in the Forex market, recommend not to neglect this or that type of analysis. The fundamental analysis makes it possible to understand the trends in the currency market in the long term and at the moment. Technical analysis with the various tools makes it possible to present existing trends visually. So you can calculate the potential levels of the beginning of large movements (or their end), the magnitude of changes, their likely correction, and most importantly - technical analysis allows you to determine the levels for opening and closing positions.

The combination of fundamental and technical analysis gives impressive results, because, representing the market situation in terms of fundamental analysis, a trader only needs to find the level to enter the market and calculate the possible Stop and Limit orders.

There are sometimes events in the market that can be explained (or predicted) in terms of only one type of analysis. For example, if during this time, there is no substantial influence of fundamental factors on the currency market, only technical analysis can tell about the direction of the game. At such moments, the movement can continue either along with a trend, or correction to it can begin, or the rate will make fluctuations in the horizontal channel. Depending on what the trend lines and technical analysis indicators show, that's where the decision is made.

Fundamental analysis of the Forex market2

There may be another situation where large movements can only be explained by analyzing economic or political events. A striking example of this is, of course, all kinds of crises. In such periods, all types of support or resistance levels and technical indicators are often forgotten (although a more thorough analysis of such markets can find their technical patterns). In this case, it is essential to identify the instruments that are most affected by a crisis and the direction of their likely movement. When trading in such conditions, the chosen course will be in the foreground, and different attributes of technical analysis will be in the second place.