The forex analysis of the market is easy as the forex market behaves in a similar fashion to any other financial market. The two major driving factors are the forces of supply and demand. When the demand for a currency is higher than supply in the market, the prices go up. When the supply is higher than demand, prices go down. When the two are in equilibrium, the market remains stable.
Your job, as a successful forex trader is to look for signals that suggest when the demand or supply will go up or down, based on government policies and market confidence.
Forex traders have many tools that can be used for forex analysis of currency trends. Generally, these analytical tools are divided into two categories; the fundamental analysis and the technical analysis.
Fundamental Forex Analysis
Fundamental forex analysis involves looking at the bigger picture of the factors surrounding a currency. This includes analyzing the economic data such as interest rates, GDP, trade balance ratios, inflation in the economy and the government’s monetary policy.
Fundamental analysis is quite broad and the trader would need to consider political, economic, social and technological factors in the target market. A forex trader working on the USD-EUR pair would need to consider economic conditions in the two zones, the political stability, balance of trade and monetary policy etc.
For example, if inflation is rising in one economy at a higher rate, it shows a loss of trust in its currency and a deterioration of its value. Similarly, if exports are decreasing and imports rising for a country, it can be a sure sign that their currency will take a hit.
Technical Forex Analysis
Technical forex analysis involves looking at the price of a currency in the market compared to other currencies to understand how it has moved over a period of time. The theory behind technical analysis is that everything that CAN affect the value of a currency DOES affect it. If we study the historical price of the currency on a line chart, we can extrapolate how the currency will behave in the future.
Generally technical forex analysis is carried out through charting or price action analysis. Charting involves representing historical price of the currency against another graphically on an X-Y axis. The Y Axis is used to indicate price while the X Axis shows time.
Price action charts are represented as candles on an X-Y axis. Trading decisions are based on recent and actual trades and how price has been fluctuating in the market.
Both technical analysis methods ignore fundamental analysis and rely solely on the technical price data.
Trading with Analytical Tools
Fundamental forex analysis involves taking in a huge amount of data from hundreds of socio-economic factors in the market. This makes it nearly impossible to use fundamental analysis for predicting future trends.
Technical analysis is relatively easier to understand and use for making price prediction. This is why a majority of forex traders prefer technical analysis for daily and weekly trades.
Both methods of analysis have their advantages. Fundamental forex analysis should be performed periodically to understand the long-term direction of prices in the market and technical forex analysis should be used to calculate price movement over a shorter period of time.
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