What are the best ways to analyze the forex market?
The Forex Market is the most complex and profitable financial market, with many participants and no central authority. Therefore, trading in foreign currencies depends on the accuracy of analysis methods. Let us learn the best ways to analyze the forex market and make money.
What is Market Analysis?
Investors put money in financial assets such as stocks, indices, commodities, and foreign exchange currencies to make money when the price of assets rises or falls.
Now the question is how the investor or trader determines when, how, where and in which financial asset to invest. The answer is by organizing market analysis.
Market analysis is a method of studying different political, economic, social, technical and historical factors that affect trading using various tools to make informed decisions and maximize profitability.
Six key benefits of conducting forex Analysis
Analysis methods assist you in every stage of trading and help you to achieve the desired results. Here are some fantastic benefits of analyzing currency trading.
- Forex trading is a risky process; thousands of traders lose money daily. Analysis helps you in determining the amount of risk and maintaining that level.
- A trader can trade in more than 180 currency pairs, meaning there are many market opportunities. Analysis helps you identify the right option that will give you maximum profit in a particular period.
- Trading without a plan and even a plan without considering analysis is a big mistake. Trading analysis assists you in formulating effective forex strategies, ultimately increasing your success rate.
- The Forex market became a popular place for scammers and fraudsters. These scammers lure you with unrealistic promises to steal your money. However, people with strong analytical skills can easily spot such fraudsters.
- The price of currency pairs fluctuates due to various economic, political and other factors. Forex market analysis helps you predict the effect of such factors on currency pairs, which will help you formulate the best trading decision.
- The market conditions of trading currencies change very rapidly. The price of currency pairs increases or decreases frequently. Analysis in forex assists you in adopting these changes quickly and adjusts your strategies accordingly.
A quick glance
Market analysis is a method of studying different political, economic, social, technical and historical factors that affect trading using various tools to make informed decisions and maximize profitability.
- Fundamental Analysis
- Sentimental Analysis
- Correlation Analysis
- Intermarket Analysis
- Technical Analysis
- Economic Calendars
- News and current affairs
- Interest Rates
- Government and central bank policies
- Inflation
- Consumer price index
- Gross Domestic Product
- Charts and Candlesticks Patterns
- Moving Averages and Oscillators
- Trend lines and forex signals
- Fibonacci Retracement
- Support and Resistance Levels
- Bollinger Bands
The best forex analysis method is to integrate all types of analysis. However, dependency on anyone analysis is not good because currencies’ value is affected due to different factors.
Best ways to analyze the Forex market
There are different types of analysis in the forex market, including sentimental, fundamental, technical, correlation and Intermarket analysis. Each analysis has its importance, features and tools. Let us understand the analysis methods in trading with examples.
Fundamental Analysis: It is the method of examining and interpreting the fundamentals such as news, economic, social, political and natural events that cause exchange rate fluctuations.
Currency represents the financial health of the country. Stronger the economic status, the stronger the currency and the weaker the economic situation, the weaker the currency.
Tools for fundamental analysis in Forex
- Economic Calendars
- News and current affairs
- Interest Rates
- Government and central bank policies
- Inflation
- Consumer price index
- Gross Domestic Product
Fundamental Analysis Example
Suppose a devastating flood occurs in Japan. The country is facing hard times dealing with the natural disaster, and the infrastructure is greatly affected. In this case, it is negative news for Japan’s Economy. As a result, the value of the Japanese Yen will decrease.
Sentimental Analysis
As the name suggests, sentiment analysis determines the mood and opinion of the market regarding particular currency pairs. Simply put, the main aim is to identify what most people feel about the financial asset.
Market sentiment plays a crucial role in forex trading. Increasing people’s belief in a particular currency strengthens its value, while people’s disbelief in currency weakens its value.
Traders use sentimental analysis for risk appetite, positioning and decision-making. For example, suppose a trendy leader tweets that the US government is all set to fall.
A trend is started on social media and news platforms in response to these tweets. It results in the people’s disbelief and dissatisfaction with the government. Therefore, it will negatively affect the USD.
Tools for sentimental analysis
- Social Media Platforms
- Forex Trading platforms
- Surveys and reports
- Application Programming Interface tools
Correlation Analysis: A correlation analysis is one of the best ways to analyze the forex market. As the name suggests, correlation analysis identifies the relationship between two financial assets or two currency pairs, which may impact your trading decision.
There are two types of correlation positive and negative. A positive correlation is when the price of two currency pairs tends to move in the same direction due to dependency on each other. Example: EUR/USD and GBP/USD, AUD/USD and NZD/USD, EUR/USD and NZD/USD, USD/JPY and USD/CHF, etc.
A negative correlation is when the price of two currency pairs tends to move in opposite directions. Examples: EUR/USD and USD/CHF, GBP/USD and USD/CHF, AUD/USD and USD/CAD etc.
One of the most popular negative correlations is between Gold and USD. The value of USD increases whenever the Gold price decreases, and vice versa.
Intermarket Analysis: Traders put their money on different financial assets, including forex currencies, bonds, commodities, stocks and indices. There is a relationship among all these financial assets.
The rise and fall of one asset impacts the other assets and financial markets. Intermarket analysis is a method of watching such interdependent assets and making trade decisions to take advantage of this dependency.
Here is an example of Intermarket forex analysis. Canada earns a massive amount by exporting oil. So whenever the price of oil increases, CAD value strengthens and vice versa.
Similarly, there is a dependency on Nikkei 225 stock and USD/JPY. Whenever the value of the Nikkei 225 rises, JPY strengthens against USD and vice versa. So trade monitors such influential interrelated financial assets.
Technical Analysis: Another popular forex market analysis method is to predict the price movement of currency pairs by studying historical data and volume data using several technical analysis indicators and tools.
Technical analysis is of two types, manual and automated. Under manual analysis, experienced and advanced traders use data to buy or sell, while in automatic analysis, robots or programming systems interpret the historical data using algorithms.
Tools for technical analysis in Forex
- Charts and Candlesticks Patterns
- Moving Averages and Oscillators
- Trend lines and forex signals
- Fibonacci Retracement
- Support and Resistance Levels
- Bollinger Bands
Technical Analysis Example
Suppose a USD/EUR chart prepared based on historical price movement suggests upward trends, which means the price of USD will rise against the EUR.
So it is the right time to buy the pair, or in the same case if the chart suggests downtrends, then a trader should sell the pair. That’s how traders make decisions using these forex analysis tools.
We have learned about all the best ways to analyze the forex market with its distinct features, uses and tools. Some people believe fundamental analysis is better, and some believe that technical analysis is better.
However, the best forex analysis method is to collaborate all the analyses. Dependency on anyone analysis is not good because currencies’ value is affected due to different factors. So a smart trader uses all the analyses together.
How to analyze the Forex market
Here is a step-by-step analysis procedure in the forex market to trade in the best possible manner.
- The first step is to educate yourself about different types of analysis, their features, and tools. Understanding the analysis method helps you in analyzing the market effectively.
- Once you have learned the basics of forex analysis, it’s time to monitor the market and formulate your trading strategy. Considering the interpretation of the analysis and using the tools to make a solid plan.
- The next step is to test your strategy. Several forex brokers‘ platforms provide access to demo accounts. Place trade with false money based on your trading strategy and check the success rate of your analysis method.
- Once you are satisfied with your analysis method, it’s time to start trading with real money. In the beginning, start trading with a small amount for risk management.
Conclusion
Analytical skills are necessary to become a successful forex trader, as the market is based on predictions. Traders make speculations to earn money—the right prediction results in profit, and the wrong prediction results in a loss.
These predictions are derived from technical, fundamental, sentimental and other analyses. There are five best ways to analyze the forex market. However, remember how effectively you conduct forex analysis and use the tools affect the overall results.