The trading of the forex market requires the ability to do the proper analysis so as to make the right decision. Forex analysis is done through charts and the examination of economic data.
Types of Forex Analysis
There are three types of forex analysis namely:
Fundamental analysis refers to the type of analysis that has to do with the evaluation of macroeconomic factors. Examples of these factors are the gross domestic product (GDP), inflation, employment/unemployment data, political stability, and natural disaster.
Fundamental analysis is based on the premise that these factors when taken together dictate the strength of a nation’s economy. This would, in turn, affect the strength of the nation’s currency.
The result of fundamental analysis can yield three results. They are:
- The strength of the economy is at par with its currency value.
- The country’s economy is stronger than the currency value is reflecting.
- The country’s economy is weaker than is portrayed by its currency.
When the economy is at par in strength with its currency, then the currency will move sideways. This means no appreciation or depreciation in the value of the currency. But since these parameters are constantly changing, this might not be maintained for long. Also, bear in mind that in the forex market, currencies are traded in pairs. Therefore, if one currency of the pair is stagnant, the other will not be, and the price will move.
Find out what moves prices in the forex market here.
If the country’s economic state is perceived to be stronger than the value of the currency at the time of analysis, then it can be adjudged that the currency would rise in value.
Finally, if the nation’s economy is found to be weaker than is portrayed by the currency, then the currency will depreciate.
Find out more about fundamental analysis.
Technical analysis in forex is the type of analysis that has to do with the evaluation of chart data. Prices of currency pairs are recorded in different timeframes and this is used to create a chart of price against time.
Looking at a price chart in the forex market is basically, looking at historic data. Therefore, technical analysis is based on the fact that history repeats itself.
There are three major types of chart in forex. They are:
- The line chart which connects the closes of the selected timeframe.
- The bar chart which displays the open, high, low and close in each bar. The timeframe determines how long it takes a bar to form.
- The candlestick chart. This chart also displays the open, high, low and close. This type of chart is the most popular.
Learn more about types of charts in forex analysis here.
The market’s future direction is identified through technical analysis by identifying specific chart and candlestick patterns. And because it has been found that history does repeat itself, decisions can be taken in line with how the market responded after the formation of such patterns in the past.
To learn more about technical analysis click here, and to learn more about chart patterns click here.
This type of analysis involves determining what other forex traders feel about the instrument being analyzed. Knowing what others feel about the market can be advantageous and help in making a good decision.
There are two major types of forex sentiment:
When the market sentiment is bullish it means that the majority of traders feel the instrument will appreciate. Therefore, they go long on it.
When the market sentiment is bearish, it means that the majority of traders feel the instrument will depreciate. Therefore, they short the instrument.
Learn more about sentimental analysis here.
In conclusion, solid analysis should be carried out before taking any trade in the forex market to prevent nail-biting losses.
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