There are several ways to analyze the Forex market. Although there are several methods to analyze the market, the sole purpose of all forms of analysis is the same, ie, to know good business opportunities within the market. When broadly classified, there are three main forms of analysis of the Forex market. They are fundamental analysis, technical analysis and sentiment analysis. Let's look at these types of analyzes in detail.
Fundamental analysis
In finance, fundamental analysis is the analysis of the financial statements of the company (usually to analyze the assets, liabilities and earnings of the company). This definition seems to be very valid in the case of the stock market. But when the futures markets and currency analyzes, fundamental analysis is to analyze the general state of the economy. As a forex trader, one basically consider factors such as interest rates, production, employment, GDP, housing, manufacturing and many more. In short, fundamental analysis in the foreign exchange market it is trying to find out if the economy is working well because the value of the currency of the country is directly affected by economic conditions in the country.
Fundamental analysis studies the political, economic, socio-cultural and physical environmental factors that have an impact on the Forex market. These factors are important because the market really reacts to this information generated by these factors. Long-term trends in markets and large movements are observed due to fundamental factors behind it. Fundamental reports act as a catalyst in the market that creates high volatility. Economic forces, economic indicators, fundamental announcements, the geopolitical environment and human psychology are primarily responsible for boosting prices.
As we speak of fundamental analysis, we note that the market is moving economic indicators. Economic indicators can have a big impact on the currency market. Knowing how to use that information may increase the profitability of traders. These economic indicators are published in a specific time interval. One can know the dates and time of the release of economic indicators looking at economic calendars that are available free online. Now let's look at some of the most important economic indicators market.
Interest rate decision
Interest rates are usually adjusted by the central banks of countries. The main reason for setting the interest rate is to control inflation. Inflation is controlled by controlling the money supply in the economy. If inflation is high, the central bank increases interest rates, which will gradually decrease the money supply in the economy because rising interest rates means that the loan is costly and deposits become attractive. This will decrease the money supply in the economy by making the value of the currency is stronger and inflation down.
Employment situation report
Employment data are generally published by the Labor Department. It is the country's employment situations. These are the data relating to employment situations.
The unemployment rate:
The unemployment rate reflects the number of unemployed people expressed in percentage terms. The unemployment rate has a great impact on the economy and also in its currency. The high rate of employment is always favorable in the economy, while low employment rates are unfavorable situations. And the value of the currency also decreases as the labor market decreases.
Nonfarm payroll
The Forex market tends to be highly volatile during the release of NFP data. NFPs are the statistics published by the Bureau of Labor Statistics US. UU. Whose aim is to represent the total number of paid US workers of any business, excluding the following workers:
-General government workers
-private household employees
-workers of non-profit organizations that provide assistance to individuals
agricultural employees
average workweek
These data represent the average hours worked per week by employees in non-agricultural section.
Average hourly earnings
These data represent the average rates of hourly earnings of employees working in major industries.
Consumer price index (CPI)
The CPI is the main tool to meet the inflation of a particular country. Inflation is an increase in the general price level. Generally speaking, when the CPI report is positive, the country's currency reacts bullish and vice versa.
Gross Domestic Product (GDP)
GDP is above the other economic indicators. GDP reflects the aggregate total economic output within a country during a specific period of time measure. GDP includes personal consumption, government spending, private consumption and foreign trade balance. GDP extremely covers the wide area of the economy, so it is an indicator that says a lot about the health of the economy. Positive gross domestic product launches are good for forex traders as a good GPD means a stronger economy.
Fundamental analysis can be very useful for long-term investors. A day trader can find pretty useless fundamental analysis. Fundamental analysis helps to have a broader view of a coin or where the currency in the long term targets image. Fundamental analysis works best for operators position.
Technical analysis
Technical analysis is another great way of analysis. Technical analysis is the study of the action of preciodel market itself rather than goods. The coach believes that "the market is always right". In other words, instead of trying to consider all the factors that influence the demand for assets, the cost of the assets and the supply curve to determine the price of a security, the coach believes that all these factors already taken into account in the curves of supply and demand and therefore the price of security. The price of the financial security is also influenced by psychological factors. Greed, fear, cognitive bias, misinformation, expectations and other factors enter into the price of a security, which probably makes the analysis of the factors almost impossible.
Although it is thought that technical analysis is an ancient method of analysis of markets and prices, its history has been poorly recorded. We have recorded evidence of technical analysis used in antiquity, but it is conceivable that technical analysis, somehow, has been used in the distant past in markets free trade.
Principles of technical analysis
A fundamental tenet of technical analysis is that the market price reflects all necessary information; therefore, its analysis analyzes the history of pattern of trade security rather than external factors such as economic, fundamental and other events. Therefore, it is likely that the price action is repeated because investors collectively tend toward a structured behavior, so that technical analysis focuses on identifiable trends and conditions. The following are the basic principles of technical analysis.
a) The market action discounts at all
Based on the assumption that all information related to the market is already reflected in prices, technicians believe it is crucial to understand what investors think of that information, known and perceived.
b) Prices move in trends
Technical analysts believe that prices have instructions, ie, up, down or sideways (flat). The basic definition of a price trend was originally submitted by Dow Theory.
c) History tends to repeat itself
Technical analysts believe that investors collectively repeat the behavior of investors who had previously shown earlier investors. For a technical trader, emotions in the market may seem random, but they exist. Investor behavior is repeated often; technicians believe that recognizable patterns (and predictable) prices will still appear on the price chart. Technical analysis is not limited to price charts, but also considers trends and directions in prices. For example, many believers technicians monitor opinion polls investors. This research measures the attitude of market participants, especially if they are bullish or bearish.
Although technical analysis was widely used by professionals, its popularity is not reflected in the academic community. But as time passed, the academic community also agreed with the fact that technical analysis helps to predict the market.
Sentiment analysis
When trading in the forex market one should know who the market participants and what they think the market. Each market participant has his own vision of the market, either bullish or bearish. The market actually reflects what all traders, me, you, professionals and all other market participants think about the market. As a retailer, any retailer can move the currency market. For example, if you are very optimistic with EUR / USD, the market does not care. So we know who the big players and we can follow to be in the right market direction.
Now we understand that each type of analysis has its own benefits and specialties. As a trader, the combination of these three types of analysis gives the best result. It would be foolish to trade without worrying about any aspect of the basics, while it would be really absurd to trade without technical knowledge of markets.
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