Lesson 11 – Ways to Analyze the Forex Market
When trading, we never enter into the market blindly. The best way to lose money is trading based on instinct and just winging it. Everything should have a reason and a methodology.
The key skill for a forex trader is to be able to make quality decisions with limited information, whilst creating and entry and exit strategy for every trade, before entering into one.
We must analyse the market, come to conclusions about currencies and their countries in order to predict how the market will move with a good probability.
As mentioned previously in the course, there are two main types of analysis when is comes to trading.
Fundamental and Technical.
Let’s go into depth on both:
What is fundamental analysis for a forex trader?
Fundamental analysis is the practice of observing macroeconomic forces that can influence a country and its currencies value relative to another currency.
The three main sectors to look at are:
Each of these can uniquely influence the currency you may be looking to trade.
Put simply, if a countries economic indicators are looking healthy. Such are low unemployment rates, growing GDP, low inflation, industry leadership, etc. Then their currency should slowly strengthen.
On the other hand, if these factors are not doing well, especially when announcements are worse than what was expected, then the currency should weaken.
As you may have guessed, fundamental analysis is more common with traders that open trades with a longer time horizon than day traders. Known as swing traders, they make trades that fundamentally rely on their analysis that a currency should adjust to what they predicted within 1-5 days. As opposed to the scalper who takes small quick win trades that last for a few minutes to a few hours.
If is wise for swing traders to always stay very up to date with the news as getting this information quickly and drawing conclusions on its knock-on effects can lead to some very opportune and lucrative trades.
Here are some of the things fundamental analysts pay attention to:
- Inflation Rate
- Interest Rate Adjustments
- Retail Sales
- Consumer Price Index (CPI)
- Unemployment Rates
- Political stability, elections
- News, should anything large happen that can affect the economy
What is technical analysis for a forex trader?
Technical analysis focuses on the historial price patterns and previous market behaviors to help predict where the market will move in the near future.
This the main kind of analysis the scalpers and day traders use, with swing traders also deploying it to a degree. Therefore, it is the main form of analysis a forex trader will want to familiarize him/herself with and that’s why we will go more into depth on it in this course.
There are very many different technical indicators to pick from, each of which uses recent historical price data obtained from the market and tries to give signals as to where the market will move next.
The majority of technical analysis is done by computers and the outputs can be programmed into your charts and graphing software. It is quite simple once you are familiar with your chosen broker.
But the difficult part is not obtaining and displaying the data, rather in using the data in your decision making.
History does tend to repeat itself in forex markets, that is the core concept that all of the technical analysis you do is based on. As you are looking for common patterns, more specifically, the beginning of a common pattern so you can most confidently predict the rest of the pattern.
Those who master this skill and implement it intelligently into their trading prove the most profitable traders.
Here are some of the top technical analysis based indicator most commonly used by forex traders.
- Support and Resistance
- Price Action
- Moving Averages
- Moving Average convergence Divergence (MACD)
- Relative Strength Index (RSI)
- Bollinger Band
We will go into depth on them all later on in the course when we take a deep dive into the advanced technical analysis.
Technical vs. Fundamental Analysis for Forex Traders
You will always find debate over which type of analysis will product the best results.
On the one hand, you often will see technical traders explaining how fundamental analysis is a waste of time, as all the information is already factored into the price.
On the other hand, you will find fundamental analysts explaining that none of the technical analysis indicators work and that these traders are unknowingly entirely relying on pure chance.
And as with all things, the correct answer is somewhere in the grey area.
There are many technical indicators that are entirely superfluous, in fact, most of them are.
However, there are a few core technical indicators that definitely carry a great amount of information and deifinitely help a trader quickly summarize all the data so that you can dynamically come to conclusions and make profitable trades regularly.
Its about market insight. The question to ask is, is this technical indicator helping me gain more market insight, or not?
We will be going into depth on these few, core technical indicators later on in this course.
Likewise, it is always a good idea to have an eye on the fundamentals.
It is worth it to be aware of key dates, announcements so that you are prepared to trade the market reactions to these events.
Furthermore, a general attention to the news is wise as you can often gauge a countries sentiment and political situation and therefore take that information into account when making your trades.
Basically, the more information you have, the better your trades are likely to be.
To sum up, for scalping, day trading and swing trading, it is best to focus on the technical analysis and to keep a supplementary eye on the fundamentals.
There is no need to becomes a doctor level economist, but a basic, core and up to date knowledge of what is happening in the worlds nations and their currencies will carry you a long way.