How To Analyze The Forex Market

forex tradingThe FX market is by far the most liquid of financial markets with a $4 trillion daily turnover. It goes without saying that it consists of many traders who know which positions to look for using technical and fundamental analysis techniques. These tools help to determine whether to buy or sell a currency pair at any given time. While technical analysis uses various graphing tools, fundamental analysis utilizes global events and economic indicators to gauge future currency price movements. Although many investors may opt to use only one analysis tool, it’s far more effective to make use of both methods when executing trade decisions.

Technical analysis relies on historical price fluctuations to forecast future price trends. Because forex is a vast 24-hour market, this data is statistically significant and central to determining future price activity. Manual technical analysis occurs when a trader observes technical indicators to determine whether to buy or sell a stock. Automated analysis is when a trader sets parameters in a software system that specifies which signals to spot and how to interpret them. Technical traders aim to predict whether a certain currency pair will trend in a specific direction or move sideways and remain range-bound. To determine what may happen, trend lines are used to connect historical levels that have prevented a rate from heading higher or lower. These levels of support and resistance give a clearer picture regarding the direction of a trend or lack thereof.

Major currency pairs, such as the GBP/USD, EUR/USD and USD/JPY, usually exhibit trends, while currency crosses (currency pairs that do not involve the USD) are often range-bound. In addition to employing the support and resistance technique for chart interpretations, various indicators are also used such as Bollinger Bands®, Fibonacci retracement, moving averages, moving average convergence divergence (MACD) and stochastics.

Fundamental analysis on the other hand is based on interpreting economic data such as interest rates, consumer price index, geopolitical events, gross domestic product (GDP), commodity prices and employment numbers. As an example, someone who trades the GBP/USD currency pairing should be aware of interest rates in Great Britain and the United States. It’s also worthwhile to stay apprised of relevant economic news emerging from each country. Interest rates are controlled by a country’s central bank and any changes have a direct effect on the currency. Even speculation regarding a possible interest rate change can cause significant movement in the forex market. When there is a strong prediction that interest rates will change, there is generally increased activity in the market because a substantial move in the currency can occur. As far as employment rates are concerned, they impact consumer spending which causes domestic demand to increase. If inflation rises too much, the central bank will step in to raise interest rates in order to ease spending.

There is no superior analysis method in forex trading. The chosen analysis technique depends on each trader’s investment timeline and access to data. For a long-term trader that has access to the most current economic news, fundamental analysis would be the better method. In comparison, for a short-term trader with access to charts and quotes, technical analysis would be the more viable option.

About Jen Perkins

Likes: saving money, being debt free (aside from our house), zombies, travel, getting money, blogging and dogs. Dislikes: debt, being broke, bunnies, wasting money, not having enough money to travel the world and paying interest. Facebook  ♥  Twitter  ♥  Google+  ♥  RSS

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