There are many ways to analyze the forex market. Though there are multiple methods to analyze the market, the primary purpose of all forms of analysis is to find out the excellent trading opportunities within the market. When classified, there are three main ways of forex market analysis. They are Technical analysis, Fundamental analysis, and sentiment analysis. Let’sLet’s look at these types of analyses in detail.
Fundamental Analysis
In finance, Simply Fundamental analysis is the analysis of a business’s financial statements (usually to analyze all the business’s assets, liabilities, and earnings). This meaning seems much valid in the case of the stock market. But when analyzing the forex and futures market, fundamental analysis is about studying the overall state of the economy. As a forex trader, one will consider interest rates, production, employment, GDP, housing, manufacturing, and many more. In short, fundamental analysis in the forex market is trying to know if the country’s economy is doing well because the country’s currency value is directly affected by the country’s economic conditions.
Fundamental analysis studies the political, economic, socio-cultural, and physical environmental factors that impact the Forex market. These factors are essential because the market reacts to the information generated by these factors. Long-term trends on the needs and huge moves are watched because of the fundamental factors behind them. So Fundamental reports act as a catalyst in the market, creating much high volatility. Economic forces, economic indicators, geopolitical environment, fundamental announcements, and human psychology mainly drive the prices.
While we talk about the fundamental analysis, we look at the market-moving economic indicators. Economic indicators can have a significant impact on the foreign exchange market(Forex). Knowing how to use that information well can increase the profitability of forex traders. Those economic indicators are released in a marked interval of time. One can understand the dates and times of the release of economic indicators by looking at the forex economic calendars, which are freely available on the internet. Let’s look at some of the most critical market-moving economic indicators.
Interest Rate Decision
The central banks of the countries generally adjust interest rates. The main motive of changing the interest rate is to control inflation. Inflation is controlled mainly by controlling the supply of money in the economy. If the inflation is high, the central bank increases the interest rate, which will gradually decrease the money supply in the economy because rising interest rates means loans are expensive and the deposits become attractive. This will reduce the money supply in the economy, making the currency’s value stronger and the inflation to fall.
Employment Situation Report
The department of labor usually releases employment data. It deals with the employment situations of that country. These are the data that are mainly concerned with the employment situations.
The unemployment rate
The unemployment rate reflects the number of unemployed people expressed in terms of percentage. The unemployment rate seriously has a massive impact on the economy so does its currency. A high employment rate is always favorable in the economy, while low employment rates are bad situations. And the targeted currency value also falls as the job market declines.
The Non-farm Payroll
The forex market tends to be highly volatile during the release of News NFP data. NFP is the news statistics released by the U.S. Bureau of Labor Statistics, whose objective is to show the total numbers of paid U.S. workers of any business, excluding the following workers:
-General government workers
-private household employees
-Workers of the nonprofit organization that assist individuals
-farm employees
Average workweek
This data represents the average number of hours per week worked by the non-farm section employees.
Average hourly earnings
This data sheet represents the average hourly earning rates of the primary industries employees working.
Consumer Price Index (CPI)
CPI is the primary tool for knowing the inflation of a particular country. Inflation is the rise in the general price level. When the CPI report is favorable, its currency reacts very bullishly to it and vice versa.
Gross Domestic Product (GDP)
The GDP stands above the rest of the forex economic indicators. GDP reflects the measure of total economic production within a country during a specific amount of time. GDP includes personal consumptions, Government expenditures, private consumption, and foreign trade balance. GDP incredibly covers a wide area of the economy, so it is one indicator that says a lot about its health. Positive gross domestic product releases are suitable for foreign exchange traders since good GPD means a more robust economy.
Fundamental analysis can be very useful for long-term investors. A day trader might find the fundamental forex analysis quite useless. Fundamental analysis helps to have a better picture of a currency or where the money is heading in the long run. Fundamental analysis works well for position traders.
Read More: Forge Your Own Forex Trading Strategy
Technical Analysis
Technical analysis is another excellent form of analysis. Technical analysis is the learning of the price action of the market itself rather than the goods. The technician believes that “the market is always right.” In other words, rather than trying to consider all the factors that will influence the cost of assets, demand for assets, and supply curve to determine the price of a security, the technician believes that all of those factors are already factored into the supply and demand curves and, thus, the cost of the security. Financial security’s price is mainly influenced by psychological factors as well. Fear, Greed, cognitive bias, misinformation, expectations, and other factors enter into the security price, which probably analyzes the elements nearly impossible. The technical analyst disregards all these factors and focuses on price to find secrets that have predictive potential in that action.
Though technical analysis is an ancient method of analyzing markets and prices, its history has been poorly recorded. We do not have documented evidence of technical analysis being used in ancient times. Still, it is conceivable that technical analysis was used in the distant past freely in traded markets.
Principles of Technical Analysis
A fundamental principle of technical forex analysis is that a market’s price reflects all necessary information; therefore, their study looks at the history of a security’s trading pattern rather than external drivers like fundamental, economic, and other happenings. So, price action is likely to repeat itself due to investors tending toward patterned behavior, so technical analysis focuses on identifiable good trends and conditions. Following are the simple basic principles of technical analysis.
Market action discounts everything.
Based on the assumption that prices already reflect all market-related information, technicians believe it is crucial to understand what investors think of that given information, known and perceived.
Prices move in trends
Technical analysts may believe that prices have up, down, or sideways (flat) directions. Dow Theory originally put forward the basic definition of a price trend.
History tends to repeat itself
Technical analysts believe that many investors collectively repeat the behavior of the investors that the previous investors had previously shown. For a technical trader, full of emotions in the market may seem a bit random, but they exist. Investor behavior repeats itself often; technicians believe that recognizable (and predictable) price patterns will continue on the price chart. Technical analysis is limited to the main price charts, but it also considers the price directions and trends. For example, many technical traders monitor surveys of investor sentiment. This research checks the attitude of market participants, specifically whether they are bearish or bullish. Technical traders use these surveys to help find whether a trend will continue or if a reversal trend could develop; they are most likely to anticipate a good change when the surveys report extreme investor sentiment Surveys that show extreme bullishness.
Though practitioners widely used technical analysis, its popularity was not mirrored in the academic community. But as time passed, the academic community also agreed that technical analysis helps in forex market forecasting.
Sentiment Analysis
When trading in the forex, one should know who the market participants are and what they think. Each market participants have their view of the market, whether bullish or bearish. The market reflects what all traders, me, you, pros, and other market users think about the market. As a forex retail trader, no retail trader can alone move the forex market. For example, if you are highly bullish on the EUR/USD, it doesn’t matter to the forex market. So we should know who are the big players are and follow them to be in the right direction of the market.
Now we have to understand that each type of analysis has its benefits and specialty. As a forex trader, blending all these three types of research gives the best result. It would be stupid to trade without caring about any aspects of the fundamentals, while it would be absurd to trade without technical knowledge of the markets.
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Read More: Economic Calendar Explained and How to Use it
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[…] look for an edge in the market. And that’s where Market Analysis comes in. There are three types of Market Analysis methods that traders use to make predictions. In this article, we’ll explore these three: […]