There are different ways to analyze the Forex market in anticipation of trading. Though categories of analysis may be plentiful, keep the end goal in sight which is to use the analysis to identify the good trading opportunities.
- Three general forms of analysis that traders use.
- Find one or combination of styles that fit your personality
- Try identifying trades by using the analytical style in a forex practice account
Now, we will look at the three most important fields of analysis and how to learn more about them. Then, try out each of these methods to determine which of the three methods works well for your personality.
The three areas are:
Forex fundamental centers mostly around the currency’s interest rate. Other fundamental factors are included such as Gross Domestic Product, manufacturing, inflation, economic growth activity. However, whether the other fundamental releases are good or bad is of less importance than how those releases affect that country interest rate.
Keep in mind that how it might affect the future movement of the interest rates. When investors are in a risk-seeking mode, money follows yield, and higher rates could mean more investment. When investors are in an adverse risk mentality, then money leaves yield for haven currencies.
Forex technical analysis involves looking at patterns in the price history to manage the higher probability time and place to enter and exit a trade. As a result, technical forex analysis is one of the most widely used types of analysis.
Since Forex is one of the largest and most liquid markets, the movements on a chart from the price action gives clues about hidden levels of supply and demand. Other patterned behaviours such as which currencies are trending the strongest can be obtained by analyzing the price chart.
Other technical studies can be conducted through the use of indicators. Many of the traders prefer using indicators because the signals are easy to read and it makes forex trading simple.
Forex sentiment is a widely popular form of analysis. When you see sentiment overwhelmingly positioned to one direction that means the vast majority of the traders are already committed to that position.
Since we know there is the large pool of traders who have already BOUGHT, then these buyers become the future supply of sellers. We know that because they are going to want to close out the trade. That makes the EUR to USD vulnerable to a sharp pullback if these buyers turn around and sell to close out there trades.