Forex Market Analysis Overview
There are two primary methods used to analyse investment decisions: fundamental analysis and technical analysis. Fundamental analysis involves looking at economic, social, and political forces that may affect the supply and demand of an asset. While technical analysis assumes that a security’s price already reflects all publicly-available information and instead focuses on the statistical analysis of price movements.
Fundamental analysis is a method of analysing financial markets with the purpose of price forecasting. In terms of forex trading, this could be simplified as focusing on interest rates and market expectations.
Fundamental indicators in forex analysis which strongly affect the direction of currency exchange rates and which make up major forex news include:
Interest Rates – one of the most important elements in a currency’s valuation is the nation’s rate of interest. High interest rates tend to attract asset flows into a nation’s currency, while low interest rates tend to repel such investment, provided that the safety of deposited funds is considered similar. (See Bank of England database – Interactive rate tracker)
GDP – the Gross Domestic Product of a country can have a strong effect on a currency’s valuation. (See BBC Economy Tracker)
Employment Data – growth in employment generally means that the economy is gaining strength, which would cause a central bank to respond with an increase in interest rates, thus making a currency more desirable. (4% June 2018 – See ONS unemployment data)
The Trade Balance – a nation’s balance of trade directly affects the valuation of its currency. If the nation’s products are in demand, more of its currency is required to purchase its items for export. Conversely, if a country imports more than it exports, more foreign currency is required to purchase imports, which consequently weakens that nation’s currency.In addition to the above major fundamental indicators, a slew of other numbers can generally affect a currency pairs value, such as CPI and PPI, Retail Sales, Industrial Production, PMI numbers and housing prices, to name just a few. (See UK Trade Balance – June 2018, Office for National Statistics)
Let’s have a look at the economic calendar. For each date, you can see a list of scheduled economic releases corresponding one of the major Forex currencies.
You can see that all events have different impact: the higher this impact is, the stronger move of the market is expected, so you can focus on the most important events.
Unemployment indicators are the exception: for them the lower the reading, the better for the currency.
Technical analysis is a method of predicting future price performance of assets based on previous and historical performance. This approach put focus on price behaviour using patterns and key levels to reason with the assets next movements.
Technical analysis charts will usually show price movement in the form of candlesticks, which illustrate key points about a market’s price in a given period of time. The colour of the candlestick denotes whether it has moved up (green) or down (red) in price, and the bars on the candlestick show the opening, closing, highest and lowest prices.
Timeframes – You may analyse any trading period (time frame) of the following: month, week, day, 4 hours, 1 hour, 30 minutes, 15 minutes, 10 minutes, 5 minutes, 1 minute. Choice of the timeframe depends on the scope of your analysis.
In terms of length, trends can be classified as:
- Long-term (6 months – 2.5 years) – major trend which can be traced on a weekly or monthly charts. It is composed of several medium-term and short-term trends, which often move against the direction of the major trend.
- Medium-term (1 week – a couple of months) is better seen on the daily and H4 charts.
- Short-term (less than a week) is better seen on hourly and minute charts.
Trend – A trend is the general direction of the price of an asset on the market. You can see from any chart that prices never move in straight lines, they are constituted of series of highs and lows. There are three types of trends:
- Uptrend (bullish trend) consists of series of higher highs and higher lows (prices are moving up).
- Downtrend (bearish trend) is classified as a series of lower lows and lower highs (prices are moving down).
- Sideways (flat, horizontal) trend – there is no well-defined trend in either direction.
Moving averages – Another commonly used indicator is the simple moving average (SMA). This is the average price of a market over a given period of time, which can be used to identify significant support or resistance levels.
Support & Resistance – Support and Resistance is key element to the practice of technical analysis. We should remember that the purpose in price analysis is not to accurately predict the future, but to improve our ability to forecast correctly more often than not.
A trading range is the spread between the high and low prices at which a pair has traded during a specified period.
At the bottom of the price range, you will find the area price has been oversold (support) and at the top where price has been over-bought (resistance).
The support price level is an important signal point for identifying likely emerging new trends, price can also “bounce” and head for resistance at this level.
Resistance serves a similar identifying purpose, but on the top price side of the trading range. A resistance level is the highest price that buyers consider worth paying for the stock.
|Technical Analysis||Fundamental Analysis|
|Definition||Uses Price movements themselves to predict future price movements||Explains which fundamental (economic) factors caused the price moves seen onthe chart and what factors will determine price movements in the future|
|Source of data||Price charts||Economic releases, news events.|
|Entry Signals||Price formations and technical indicator signals||Buy(sell) when the asset becomes under(over) valued|
|Type of Trader||Swing traders, short-term day traders||Usually long-term position traders|
|Time horizon||Position is held for days, hours, minutes, seconds||Position is held for days, weeks, months|
|Main concepts||Dow theory, support & resistance, price patterns||Comparison of the actual economic figures with expected/historical readings|
In the long-term, determine the trend using fundamental analysis and then identify an entry and exit point using technical analysis tools.
Both fundamental and technical analysis have their advantages and drawbacks, so it’s best to combine these 2 methods. This way you will get the fullest view of what is happening at the market