A FOREX analysis is a way where traders, through examining the changes in the FOREX market, will determine whether to buy or sell a currency pair. FOREX analysis could be fundamental, by making use of economic indicators and news-based events or they may be technical, using charting tools.
How do you make a FOREX analysis?
Well, FOREX analysis can be either manual or automated.
Manual systems involve a trader sitting in front of the computer screen, analysing and interpreting signals which will let him know or interpret whether to buy or sell.
On the other hand, in automated trading analysis, the trader teaches the software which signals to look for and how to interpret them. Even though this makes it simpler to some people, many users prefer the manual analysis because it keeps the element of human psychology in trading.
Types of trading analysis used in the FOREX Market
Many traders search only for one type of trading analysis in FOREX, and it is common to see users asking and debating as to which analysis is better; but, to be honest, it is better to know all of these analyses.
There are three types of FOREX Market Analysis, which are different ways to analyse the market and develop ideas to trade in it.
If you see an opportunity in a trade, try to analyse it with these three analysis techniques. If you see one of your analysis on any of the three types of trading is weak, the best thing for you should be to ignore it and continue.
- Fundamental Analysis
FOREX fundamental analysis focuses mostly on the currency’s interest rate. It is a way to look at the FOREX market by analysing different forces that may affect the supply and demand of an asset, and these forces may be economic, political, or social forces. There exist other fundamental factors which include Gross Domestic Product, inflation and manufacturing economic growth activity. What changes from these other primary releases isn’t whether it’s good or bad, but how those releases affect that country’s interest rate.
The fundamental analysis uses supply and demand as an indicator of where the price could be headed, and it isn’t really hard, the hard part comes when you have to analyse all of the factors that affect supply and demand, which some of them were mentioned earlier.
The principal idea behind the fundamental analysis is that, if a country’s current or future economic outlook is good, their currency should strengthen; and then, it will affect the level of its demand.
Well, if the country’s economy is in good shape, it will increase the possibilities of more foreign businesses and investors investing in that country, which means that they will need to purchase that country’s currency to obtain those assets.
- Technical Analysis
FOREX technical analysis involves looking at patterns and movements in price history to determine the current trading conditions and potential price movement to enter and exit a trade. So, in Theory, all current market information is reflected in the price.
The technical analysis follows the adage “History tends to repeat itself”.
Well, the technical analysis states that, if a price level held as key support or opposition in the past, traders will stay tuned for it and base their trades around that historical price level.
Users state that, with FOREX being one of the largest and most liquid markets, the movements on a chart for price action give clues about hidden levels of supply and demand. Reviewing the price chart can provide other patterned behaviours, such as which currencies are trending and which one is the strongest in the market.
Other technical analyses can be conducted by using indicators, It gives easy-to-read signals and makes the FOREX trading simple. Those reasons attract the attention of many traders into using indicators.
- Sentiment Analysis
And last, but not least, there’s the FOREX sentiment analysis.
Seeing sentiment overwhelmingly positioned in one direction, the vast majority of traders are already committed to that position.
The FOREX market do not merely reflect all of the information out. If that happens, all traders will act the same way, and things don’t work like that, which is where the sentiment analysis plays its role.
In a market where there are millions of traders, each one has their own opinion of why the market is acting the way it does and whether to trade in the same direction of the market or against it.
The market is just like a social network.
For example, liteforex.com is a complex network made up of individuals who want to spam their news feeds. The market represents what all traders feel about the market, their thoughts and opinions, expressed through whatever position they take, helps form the overall sentiment of the market, regardless of what information is out there.