Best ways to apply Forex market analysis

Individual forex day traders are the ones who typically use forex analysis to assess whether to purchase or sell certain currency pairs. These resources could be technical in nature like charting tools or be fundamental such as economic indicators and/or news-based events. Visit multibank group 

Types of Forex Market Analysis

Analysis could look like a vague concept to amateur forex traders but you can further break it down into three basic types. 

1) Fundamental

Forex fundamentals typically revolve around the currency’s interest rate. This is because interest rates can have a major impact on the forex market. Other fundamental factors which should be taken into account are gross domestic product, inflation, manufacturing, and economic growth activity. But, you should remember that the fundamental releases which can have an impact on a country’s interest rate are more important. 

Traders who assess the fundamental releases need to bear in mind the kind of effect it might have on the interest rates in the future. In the times when investors are not too averse to risk, there’s scope to earn more as there are certain currencies which offer better interest rates which could translate to more investment. But if investors are not open to a lot of risk, then it is only the safe-haven currencies where there’s more yield. 

Let’s take the example of a trader carrying out fundamental analysis of the EUR/USD currency pair. For them, it would be useful to learn about the interest rates in the Eurozone rather than those which prevail in the U.S. Those traders would also prefer to stay ahead of any important news releases that may be emerging in the Eurozone nations to be able to ascertain their economic health conditions. 

 

2) Technical

Forex technical analysis requires you to study the price history patterns to be able to deduce when and at what point you should be entering or exiting a trade. This is why technical analysis in forex is quite common. Given that the forex market is the largest and the most liquid financial market around the world, chart movements due to price action hints at underlying levels of supply and demand. Different kinds of patterned behavior like the ones where you can identify the strongest currency trends can be determined after reviewing the price chart. 

 

3) Sentiment

 Sentiment analysis helps one see what the traders feel about the market and if that sentiment pertains to the market as a whole or about a certain currency pair.

Before, we mentioned that price action must in theory, reflect all the market details. However, in forex trading, this is not so easy. The forex markets cannot reflect all the information out there as traders don’t all act in the same manner. This makes sentiment analysis all the more relevant as it helps take into account the opinion and take of individual traders. 

 

Applying Forex Market Analysis

It is necessary to be critical of the elements which are part of forex market analysis. Below is a short outline.

 

1. Understanding Market Drivers

To be able to master the art of successful trading, a trader should develop a sound understanding of the present equation between markets and also comprehend why these relationships exist. You should be able to take things with a pinch of salt as these relationships tend to change over the course of time. 

For instance, a stock market recovery may be easy to understand for the investors who were expecting it. They are of the view that firms would have better earnings and thus have better future valuation, thus making it a good time to purchase. But speculation on the basis of liquidity might be the reason why there’s momentum in the market and the prices are going up because of greed. This is when you need to ask what is causing these changes. 

 

2. Charting the Indices

A trader should benefit from charting the key indexes for every market over a longer time period. Such an exercise should be useful for a trader to establish the connections between markets and determine how movement in the market could impact another. 

For instance, in 2009, gold prices soared. This could have been because of the larger view that the value of paper money was decreasing and so people invested in the metal or it could also be the case that the low rate of dollars was behind this boom. 

 

3. A Consensus in Other Markets

We could ascertain if the markets are about to reach a turning point consensus by charting different instruments on the same weekly or monthly basis. That should help us make the most of the consensus to be able to trade an instrument that would respond to that turn. 

 

4. Time the Trades

There are better chances of being successful in the trades if one is able to identify the turning points on the longer timeframes, then move to a shorter time period to improve on an entry. The first trade might be at the same Fibonacci level or double bottom as per what the longer-term chart suggests. If it doesn’t pan out, you might find another opportunity on a pullback or a support-level test. 

It takes a lot of patience, discipline, and preparation to stand out from the crowd that trades without any plan in place or analyzes too many forex indicators.

 

Acquiring Trading Tools and Strategies

A day trader's currency trading system could be used either manually or through one of the automated forex trading strategies which use technical and fundamental analysis. You can get them free of cost or for a certain fee. It may even be created by some tech-savvy traders. Automated technical analysis, as well as manual trading strategies, can be bought online but one needs to remember that these trading systems don’t guarantee success. If these systems were known to make money for sure, sellers would not be willing to share them. It would be treated the same way the top big financial firms safeguard their "black box" day trading programs.