Currency analysis is used by retail forex day traders decide to buy or sell decisions on currency pairs. It can be technical in nature, using resources such as mapping tools. It can also be fundamental in nature, using economic indicators and/or news-based events.
Types of Forex Market Analysis
Analysis may seem like an ambiguous concept to a new currency trader. But it actually falls into three basic types.
Fundamental analysis is often used to analyze changes in the forex market by monitoring numbers, such as interest rates, unemployment rates, gross domestic product (GDP), and other types of economic data from countries. For example, a trader doing fundamental analysis of the EUR/USD currency pair would find interest rate information in the Eurozone more useful than that in the United States. These traders would also want to be aware of any major press releases coming out of each Eurozone country to gauge the relationship to the health of their economies.
The technical analysis comes in the form of manual and automated systems. A manual system usually means that a trader analyzes technical indicators and interprets this data into a buy or sell decision. Automated trading analysis means that the trader “teaches” the software to look for certain signals and interpret them to execute buy or sell decisions. Where automated analysis might have an advantage over its manual counterpart is that it is intended to behavioral economics apart from business decisions. Forex systems use past price movements to determine where a given currency may be heading.
Analysis of the weekend
There are two basic reasons for doing a weekend analysis. The first reason is that you want to establish an overview of a particular market that interests you. Since the markets are closed and not in dynamic flux over the weekend, you don’t need to react to situations as they unfold, but you can observe the landscape , therefore, to say.
Second, the weekend analysis will help you set up your trading plans for the coming week and establish the necessary mindset. A weekend scan is akin to an architect preparing a plan to construct a building to ensure smoother execution. Tempted to trade without a plan? Bad idea: Pulling from the hip can leave a hole in your pocket.
Application of Forex market analysis
It is important to think critically about the principles of forex market analysis. Here is a four-step plan.
1. Understanding Drivers
Part of the art of successful trading is due to an understanding of current market relationships and why those relationships exist. It is important to have a sense of causation, remembering that these relationships can and do change over time.
For example, a stock market rally could be explained by investors anticipating an economic recovery. These investors believe the companies will have improved earnings and, therefore, higher valuations in the future, so now is a good time to buy. However, speculation, based on a flood of liquiditycould fuel the momentum and good old greed pushes prices higher until bigger players are on board so selling can begin.
Therefore, the first questions to ask are: why are these things happening? What are the drivers behind market actions?
2. Trace the clues
It is useful for a trader to plot the important indices for each market over a longer period. This exercise can help a trader determine the relationships between markets and whether a move in one market is inverse or in concert with the other.
For example, in 2009, gold reached record highs.Was this move a response to the perception that paper money was declining so rapidly that a return to hard metal was necessary or was it the result of cheap dollars fueling a commodity boom? The answer is that it could have been both, or as we saw above, speculatively driven market moves.
3. Look for consensus in other markets
We can get an idea of whether or not the markets are reaching a turning point consensus by plotting other instruments on the same weekly or monthly basis. From there, we can take advantage of the consensus to enter a trade on an instrument that will be affected by the turn. For example, if the USD/JPY currency pair indicates an oversold position and the Bank of Japan (BOJ) could intervene to weaken the yen, Japanese exports could be affected. However, a Japanese recovery risks being jeopardized without the yen weakening.
4. Time transactions
There is a much higher chance of a successful trade if one can find reversal points on longer timeframes and then move to a shorter timeframe to refine an entry. The first trade can be at the exact Fibonacci level or double bottom as shown on the longer term chart, and if that fails, a second opportunity will often present itself during a pullback or a test of the support level.
Patience, discipline and preparation will set you apart from traders who simply trade on the fly without any preparation or analysis of multiple forex indicators.
Acquire Forex trading systems and strategies
A day trader’s currency trading system can be applied manually, or the trader can use automated systems forex trading strategies that integrate technical and fundamental analysis. These are available for free, for a fee, or can be developed by more tech-savvy traders.
Automated technical analysis and manual trade The strategies are available for purchase on the Internet. However, it is important to note that there is no “holy grail” of trading systems in terms of success. If the system was a foolproof money generator, the seller wouldn’t want to share it. This can be seen in the way large financial firms keep their “black box” trading programs locked away.
There is no “best” method of analysis for forex trading between technical analysis and fundamental analysis. The most viable option for traders depends on their timing and access to information. For a short-term trader with only delayed information on economic data, but real-time access to quotes, technical analysis may be the preferred method. Alternatively, traders who have access to breaking news and economic data may prefer fundamental analysis. Either way, it doesn’t hurt to do analysis on the weekends when the markets aren’t in a constant state of fluctuation.