8. FOREX Analysis
Analysis is the means of determining the appropriate time to do a trade. After understanding the basics of Forex, it is required that the trader is able to determine the time at which he can buy or sell a currency. For this, he needs to analyse. Analyse what? You got it right!! Analyse the market trend or price movements through various tools and techniques which we are going to talk about now. Technical Analysis, Fundamental Analysis and Sentiment analysis are the three kinds of Market Analysis. As a trader you should be aware of all the three kinds of analysis. We will soon get to know why all three.
- Technical Analysis
Technical analysis is the analysis of past price movements either manually or automatically to identify the trend in the price of a currency. Ok but how does that help? Does the analysis of past price movement really help? If so how? Answer is quite simple, TREND.
Yes, historical price movements indicate the way currency value has changed in recent past and hence traders identify a trend. Analysts tend to keep an eye on the price fluctuations and look for similar patterns from the past to make use of the opportunity in the current market to make a profit.
How is technical analysis done? Analysts can do technical analysis by manually analysing the past price movements or automatically through the use of software. The rules and indicators are set through the software to do the analysis for the trader. On the other hand, when doing manually traders refers to charts to look at past data and to understand the direction of price movements.
Technical analysts/traders use various market indicators to predict future price movements. What are market indicators? Market indicators help the traders identify the best time to buy or sell. Market indicators like Bollinger bands, Fibonacci and Pivot points are used as tools for technical analysis. Don’t worry about these now. Market Indicators by itself is a huge topic. We will definitely get there.
- Fundamental Analysis
Fundamental analysis involves the study of economic factors in a country in order to trade currency more effectively. So, through fundamental analysis traders try to analyse all the factors such as political or social conditions that may affect the value of currency. The financial conditions in a country, its overall economy and market conditions are analysed as part of fundamental analysis. Keep in mind that the goal still is to be able to forecast and make profit out of future price movements. As with technical analysis, fundamental analysis also helps traders to determine what kind of position to take in the market and at what time.
The better the country’s economic conditions, the stronger will be its currency. Which means, if the economy is good, there will be more businesses and foreign investments in the country which results in the demand for that countries currency to go high.
Traders keep a watch on the economic news and economic announcements made through speeches given by country’s important politicians and economists. Also, there are economic calendars available for traders to keep an eye on. These calendars predict economic values and figures based on which traders can analyse and trade.
Other factors to look for include the employment situation in a country, gross domestic product (GDP) and interest rates. For example, an increase in the unemployment rate results in lower interest rates and hence a decrease in the value of currency.
- Sentiment analysis
Sentiment analysis is about analysing the market sentiments. As a trader, you have to ensure you understand how the market feels at any point of time. This means we need to understand how market participants feel about a particular currency i.e. if it’s going to go high or low.
Market sentiments are formed by each individual traders view and opinion about the price movements. Sentiment data from the market are also charted and can be easily understood by the traders to get an idea of overall market conditions.
A successful trader should be able to use the market conditions to come up with his trading strategy and make profit out of it. As a trader if you feel the price of a particular currency would go up in future but the whole market thinks other way round, you can’t change the market conditions in your favour. Thus sentiment analysis is equally important as technical and fundamental analysis.
As already discussed, fundamental analysis provides a view of the market movement based on economic conditions, while technical analysis uses trends to detect future price movements. Similarly sentiment indicators can be used alongside other two kinds of indicators to predict market conditions.
Sentiment indicators indicate the amount of position taken by traders for a currency pair in a market. By using this traders can determine the percentage of traders who are taking long or short positions and decide upon the strategy he wishes to follow. Sentiment indicators become really useful when the position taken by the traders in a particular currency pair becomes maximum. Sentiment indicators come in various forms and are very useful.
It is up to the traders to decide the kind of analysis that suits them based on their time and conditions. But it is really required that as a trader you are aware of all the 3 kinds of analysis which you are by now.