In forex trading, forex analysis is utilized by traders in order to figure out whether to buy or sell a particular pair of currency. The analysis could be technical where tools like charts, etc. are used. On the other hand, it can also be fundamental in nature where economic indicators or the latest news are used to determine the bur or sell off the currency.
So basically, forex trading analysis can be divided into two parts:
- Fundamental Analysis in Forex
- Technical Analysis in Forex
In fundamental analysis, the economic, social, and political factors are considered during the analysis of the demand and supply of a particular currency. This analysis is frequently used to study the changes or fluctuations in the forex market by keeping an eye over the factors, such as GDP, interest rates, and several other forms of economic information that are released by different countries.
While, an analyst usually considers all the factors including economic, social, and political, it is the economic factors or indicators that play a leading role in deciding the market position.
Given below are three main economic indicators that play a major role in making a
- Leading indicators - Leading economic indicators comprises of the factors that represent what is going on or what can happen in the economy of a country. The leading indicators provide with an insight into an economy’s past, present, and future. The leading indicators help in anticipating the future price movements of the currencies and give the traders an advantage of earning the best profits and avoid losses.
- Coincident indicators - The reliability of leading indicators depends on the coincident indicators. Coincident indicators are more associated with economic elements like the business cycle of the country. These indicators give a more detailed insight into why and how changes in the economy are taking place activity, how long the change might last, and whether the result will be positive or negative. Some of the coincident indicators are inflation, retail sales, etc.
- Lagging indicators - A lagging indicator comprises of the factors that fluctuate only after the country economy has started to follow a particular trend. A lagging indicator is kind of a financial indicator which can only be seen after a huge economic movement or fluctuation takes place. Some of the popular lagging indicators in forex market are unemployment rate and interest rates.
Together with fundamental analysis, technical analysis is also very crucial in identifying the position of the forex markets. This is especially very effective and useful in the foreign exchange market, where several retail traders depend solely on technical analysis to determine future price motions of a currency pair.
Technical analysis involves the examination of past price trends so as to determine the future movements in the market using technical studies, and other technical analysis tools. Forex markets can move only in three directions, upwards, downwards, and sideways. One of the most crucial elements needed for the successful implementation operation of technical analysis is a lot of historical data, which is why the forex market is a prime opportunity for those who would like to use technical analysis in their trading.
The main objective of the technical analysis is:
- To recognize price trends
- Identifying the support or resistance for the price using price graphs and time-frames.
With the help of technical analysis of a forex market, you can ascertain when and from where to enter a forex market, and most importantly when to get out of the market. As, forex market stays open for 24 hours a day, and provides with highest every day turnover as compared to any other financial markets in the world.
Technical Analysis to Identify Trends
As fundamental analysis focuses on whether a currency is overpriced or underpriced as compared to its equilibrium price, technical analysis is more involved with whether the currency is moving towards up, down, or sideways. If a pair of currency makes sudden jump above or beneath a crucial historical price level, then the technical analysis models will supply you with a recommendation to opt for either long or short for that pair of currency based on the price level.
There are basically three leading trends that can occur in the forex market. They are upward trends, downward trend, and a sideways trend. Let’s have a look at them:
- Upward Trend - It describes the broader trend when the price of a currency is moving upwards. In an upward trend, each consecutive price level is higher than the ones that have already been attained earlier in the trend.
- Downward Trend - It represents the broader trend when the price of a currency is moving downwards, with each approaching price level is lower than the one before that.
- Sideways Trends - A sideways trend is a trend where the movement of the currency price occurs when the demand and supply of the currency are almost equal. A sideways market trend takes place when the market price of a currency moves within a limit without creating any defined patterns or trends. Price moves in a horizontal way, with neither upward or downward trend taking control of the prices.
Fundamental Analysis Vs Technical Analysis
Fundamental analysis works towards calculating the intrinsic value of a currency based on the data such as GDP, interest rates, inflation, rates, etc. On the other hand, technical analysis utilizes the historical market activities and currency price trends in order to evaluate market price trends in the future.
The fundamental analysis employs a long-run approach to analyze the market conditions while using the data from a number of years. So, fundamental analysis is mostly used by the long-term forex market investors as it assists them in selecting the right currencies who value will increase with time in future. As for technical analysis, it takes a relatively short-term approach in order to analyze the market activities and trends and is used on daily or weekly timeframes. As a result, technical analysis is mostly utilized by day traders who look for the currencies that they can sell in near future and make higher profits. The trading takes place within the short-term period.
If you want to learn how to do Forex Trading in Sri Lanka, or how to choose right Forex Brokers in Sri Lanka, you can refer to Introduction to Forex Trading , and Where to trade Forex Online and type of Forex brokers .